Faced with revenue shortfalls in a pandemic year, the Centre and the Reserve Bank of India (RBI) is likely to review its borrowing plans for the second half of the financial year, ending on March 31. However, the government will consider monetising its deficit only as a last resort, Reuters reported citing official sources.
The officials have already discussed the possibility of monetising the debt, whereby the central bank prints money to bridge the fiscal deficit, but they were in no hurry to return to a bad habit India kicked in 1997. "There will definitely be higher borrowing in the current year but whether we will print money, that is not yet decided. We will have to have patience and see how things go," a senior official said. Printing more money will heighten the risks of inflation.
A senior government official said debt monetisation was "not the preferred option right now", adding the central bank could ease liquidity through open market operations to keep yields in check while helping the government to increase borrowing, already targeted at a record 12 trillion rupees ($163 billion).
The RBI has pumped in over Rs 11 lakh crore of liquidity into the market, helping to keep 10-year bond yields below 6 per cent even as the government decided to borrow 70 per cent more than last year as a result of the pandemic.
India's GDP contracted 23.9 per cent on year in the April-June quarter, with Goldman Sachs now projecting a full-year contraction of 14.8 per cent.