‘Nowhere near such a scenario’: Ex-RBI Gov Subbarao says printing money should be last option


Should the Reserve Bank of India directly print money and finance the government? While some believe that it seems like the logical next step, former RBI Governor D Subbarao thinks not. Subbarao, on Wednesday, suggested that the government should consider COVID-19 bonds as an option to raise borrowing instead.

“It (RBI) can print money but, it should avoid doing so unless there is absolutely no alternative. For sure, there are times when monetisation — despite its costs — becomes inevitable such as when the government cannot finance its deficit at reasonable rates. We are nowhere near such a scenario,” he said in an interview to news agency PTI.

The former RBI Governor said that when people say the central bank should print money to finance the government’s deficit they don’t realise that it is doing so even now but indirectly.

To illustrate the point, Subbarao gave the example of RBI buying bonds under its open market operations (OMOs) or buying dollars under its forex operation. He said that it is printing money to pay for these purchases, and that money indirectly goes to finance the government’s borrowing. “The important difference though is that when RBI is printing 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 into the system,” Subbarao added.

The former RBI Governor said that, in contrast, monetisation is a way of financing the government’s fiscal deficit with the quantum and timing of money to be printed decided by the borrowing requirement of the government rather than the RBI’s monetary policy, “That will be seen as RBI losing control over the money supply, which will erode the credibility of both the RBI and the government with costly macroeconomic implications,” he said.

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Subbarao said COVID-19 bond is something worth considering, not in addition to budgeted borrowing but as part of it. “Appropriately priced and structured, they can provide relief to savers who are short-changed by the low-interest rates on bank fixed deposits. Moreover, such Covid bonds will not add to the money supply and will not, therefore, interfere with RBI’s liquidity management,” he pointed out.