Govt gets new idea to again tap into RBI funds to prop up economy, learning from Indonesia this time

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Published: July 22, 2020 4:10 PM

Although it would not be the first time when the centre may get an advantage of RBI’s surplus liquidity, the desired benefits can be obtained by other means as well.

rbi, reserve bank of india, sovereign bond, central government, india bond, Selling bonds to the Reserve Bank is a direct way of raising additional funds at a lower cost while steps like asset sales help to shore up non-tax revenues.

The government may have got a new idea to once again dip into the Reserve Bank of India’s surplus funds to meet economic expenses amid coronavirus, with the latest cue coming its way from Indonesia. After Indonesia’s central bank recently purchased $40 billion in sovereign bonds from the nation’s government to monetise debt, an Indian government official told The Indian Express that India too should not close this option, as Prime Minister Narendra Modi’s government gets ready to roll out another set of measures to support the economy. Rather, the administration must discuss in detail what could be its impact on inflation, debt sustainability, and currency market, the report cited the official.

Cheap, Direct Funding

The government may announce a fresh set of measures in September, The Indian Express report said. Selling bonds to the Reserve Bank is a direct way of raising additional funds at a lower cost while steps like asset sales help to shore up non-tax revenues. “While the central banks across the world are stepping up to support the government, if the RBI also moves forward to support the Indian government, there will be no harm in it,” Sameer Narang, Chief Economist, Bank of Baroda, told Financial Express Online. However, using the market route will be more beneficial as it will send a signal that the markets are broad now, he added.

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Although it would not be the first time when the centre may get an advantage of RBI’s surplus liquidity, the desired benefits can be obtained by other means as well. “In Indonesia, the central bank may be buying the bonds to fund the fiscal gap which will be in excess of 6.25 per cent this year. In India’s case, OMO purchases by RBI can serve a similar purpose,” Sameer Narang said.

Biting Into RBI’s Pie

An Indonesia-like move would mean that the government, which has gained access to the Reserve Bank of India’s surplus capital reserves in recent years, would get further support from the liquidity lying with the central bank. Last year, the RBI accepted Bimal Jalan committee’s recommendations and approved a surplus transfer of Rs 1.76 lakh crore to the government. The surplus comprised Rs 1.23 lakh crore for 2018-19 and Rs 52,637 crore of excess provisions identified as per the revised Economic Capital Framework (ECF) adopted at the board meeting.

Meanwhile, the government’s fiscal deficit has significantly grown as it has shelled out a fortune in the previous set of relief measures. Prime Minister Narendra Modi earlier introduced the Atma Nirbhar Bharat package which was worth Rs 21 lakh crore and comprised 10 percent of GDP. The package included relief for a wide range of people and businesses. It was for the first time when the lowest segment, street vendors, etc, was also included in a welfare plan.

Through the PM SVANidhi scheme under the same package, the government had pledged to give a working capital loan of up to Rs 10,000 to registered street vendors in order to help them resume their businesses hit by the coronavirus pandemic and the nationwide lockdown. Besides, the government had also announced loan guarantees worth lakhs of crores of rupees for small and medium businesses across the country.

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