Government can use the escape clause in the FRBM Act to monetise the deficit: Usha Thorat – The Economic Times

The RBI, along with the government, would have to ensure the additional borrowing programme does not put pressure on bond yields, said Thorat. She said there should be a little more incentive to primary dealers to underwrite the auctions, then the involvement of the RBI to that extent can be minimised.

Fourteenth finance commission member Sudipto Mundle, who was also part of the webinar, said residual deficit could be monetised by the RBI.
Former Reserve Bank of India (RBI) governor Usha Thorat said if necessary the government could use the escape clause in the Fiscal Responsibility and Budget Management (FRBM) Act which allows the central bank to monetise the deficit.

“There should be a balanced use of all instruments, issuing paper into the market, using the primary dealer system, doing open market operations and then, if necessary, there is no reason why the escape clause in the FRBM cannot be utilised to do private placement, which means primarily the government debt is then absorbed by the RBI and then over some time the RBI sells those securities in the market,” Thorat said at a webinar organised by the National Council for Applied Economic Research on Friday.

The RBI, along with the government, would have to ensure the additional borrowing programme does not put pressure on bond yields, said Thorat. She said there should be a little more incentive to primary dealers to underwrite the auctions, then the involvement of the RBI to that extent can be minimised.

“So use the primary dealership system, use the auction route to see how the market is able to absorb this additional borrowing without putting pressure on yields and, if necessary, one can always intervene in the market through open market operations, absorb some of that government securities and keep the pressure on yields stable,” said Thorat.

Fourteenth finance commission member Sudipto Mundle, who was also part of the webinar, said residual deficit could be monetised by the RBI. He said the government should spread out its borrowing and lending programme for the Rs 20 lakh crore stimulus package over the course of the next two fiscals to sustain economic recovery while maintaining stability of the financial system.

“To absorb this Rs 20 trillion package, whether it is through additional spending or liquidity measures, in one year is asking a lot and it may actually cause instability in the system. So we suggest that this amount be spread out over the next two financial years so that you have a more manageable borrowing program and lending,” Mundle said.

via Government can use the escape clause in the FRBM Act to monetise the deficit: Usha Thorat – The Economic Times

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