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The Reserve Bank lowered the country’s growth projection for the current fiscal year to 9.5% from an earlier estimate of 10.5%, amid uncertainties created by the second wave of the coronavirus pandemic, while the World Bank forecast on Tuesday that the Indian economy is expected to grow by 8.3% in 2021.

New Delhi: The central bank can directly print money and finance the government, but it should avoid doing so unless there is absolutely no alternative, former RBI governor D said on Wednesday. Subbarao, while stressing that India is “far” from such a scenario.

In an interview with, Subbarao suggested that to deal with the second wave of economic downturn induced by COVID-19, the government may consider Covid bonds as an option to increase borrowing, not in addition to budgeted borrowing. , but under that. .

“He (RBI) can (print money) but, he should avoid doing it unless there is absolutely no alternative. Of course, there are times when monetization – despite its costs – becomes inevitable as when the government cannot finance its deficit at a reasonable price.

“We are far from such a scenario,” he said.

The Indian economy contracted 7.3% less than expected during the fiscal year ended March 2021. For 2021-2022, the deficit has been estimated at 6.8% of GDP, which will be further reduced to 4.5% by 2025-2026. .

The Reserve Bank lowered the country’s growth projection for the current fiscal year to 9.5% from an earlier estimate of 10.5%, amid uncertainties created by the second wave of the coronavirus pandemic, while the World Bank forecast on Tuesday that the Indian economy is expected to grow by 8.3% in 2021.

According to Subbarao, when people say the RBI should print money to finance the government deficit, they don’t realize that the central bank is printing money even now to finance the deficit, but it does so indirectly. .

For example, he said, when the Reserve Bank of India buys bonds as part of its open market operations (OMO) or purchases dollars as part of its foreign exchange operations, it prints money. money to pay for these purchases, and this money is used indirectly to finance government borrowing. .

“The important difference, however, is that when RBI prints money as part of its liquidity operations, it is in the driver’s seat, deciding how much money to print and how to channel it through the system,” noted the former governor.

In contrast, Subbarao said, monetization is seen as a way to finance the government’s budget deficit, with the amount and timing of the printing of currency being decided by the government’s borrowing needs rather than monetary policy. of the RBI.

“This will be seen as the RBI’s loss of control over the money supply, which will erode the credibility of both the RBI and the government with costly macroeconomic implications,” he observed.

The RBI’s monetization of the budget deficit means that the central bank prints the currency for the government to deal with any emergency spending to close its budget deficit.

When asked if a Covid bond was an option the government could consider for borrowing, the former RBI governor said: “This is something to consider, not in addition to budgeted borrowing, but in part of that “.

In other words, Subbarao said that instead of borrowing in the market, the government could increase part of its borrowing needs by issuing Covid bonds to the public.

“Priced and structured appropriately, they can provide relief to savers who are harmed by low interest rates on bank term deposits.

“In addition, these Covid bonds will not increase the money supply and therefore will not interfere with the RBI’s liquidity management,” he stressed.

Asked if the RBI can generate more profit to help ease government budget stress, Subbarao said the central bank is not a commercial institution and profit making is not one of its objectives.

According to Subbarao, in the course of its activities, the RBI makes profits and withholds a portion of it to meet expenses and build up reserves, and transfers the “excess profit” to the government.

“The amount he can withhold to write off his reserves is now prescribed by the Bimal Jalan committee.

“The RBI should not do anything with the express intention of making a profit,” he said.

The RBI transferred Rs 99,122 crore to the government as surplus profit, nearly double the budgeted amount.

Asked what else the RBI can do to help the economic recovery, Subbarao said that since the pandemic hit us over a year ago, the RBI has acted quickly and in innovative ways.

“What the RBI can do in the future is what the governor said in his recent policy statement, that is, there is an” equitable distribution of cash is that is, credit support must go to the most troubled sectors, “he said.

To a question – can the RBI adopt even more unconventional policies, Subbarao said there are limits to what an emerging economy central bank like the RBI can do in relation to countries’ central banks. rich like the Fed or the ECB.

“Developed economies have the wiggle room and the firepower to throw the kitchen sink on the problem. They borrow in hard currency, which everyone needs.

“We do not enjoy this comfort. In addition, the markets are less forgiving the excesses of central banks in emerging markets,” he observed.


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