Monetisation is not a benign solution: Subbarao

Posted By: Staff
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Mumbai, Apr 7: Reserve Bank of India (RBI) Governor Duvvuri Subbarao has said that there was a long-term cost to monetising the budget deficit that needed to be considered despite the apparent short-term benefits of not tapping the market for funding.

Subbarao said that government borrowing in the 2009-10 fiscal year would be significantly higher than in the previous year.

"This year, we expect the current account deficit to be higher, than it was in the last year. We expect the capital flows to be substantially lower," said ubbarao.

Last Tuesday, Mar 31, the Confederation of Indian Industry (CII) called for monetisation of the deficit to aid private investment and boost the slowing economy, despite risks of inflation and sovereign downgrades.

A sudden increase in funding to plug the deficit at the end of 2008-09 saw an agreement where the Apex bank would transfer 450 billion rupees of funds held against Market Stabilisation Scheme (MSS) debt to the government to ease pressure on the market.

The Government borrowing in the 2009-10 fiscal year that started on Apr 1 is already slated at a record 3.6 trillion rupees, and there had been some speculation of direct selling debt to the central bank, a process known as monetisation, to ease the pressure on the market and bond yields.

India's current account deficit rose to an 18-year high of 14.64 billion dollars in the December quarter as the global economic and financial crisis choked inflows.


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