The government has taken measures to contain expenditure, like freeze on its employees’ dearness allowance; it has also announced a relief package to support the vulnerable and disadvantaged sections.
The Reserve Bank of India (RBI) has not yet taken a view on monetising the Budget deficit, which is set to surge due to government’s ongoing fight against the Covid-19 pandemic, governor Shaktikanta Das said. Das told news agency Cogencis in an interview, whose transcript was released by RBI on Monday, that going beyond the 3.5% target for fiscal deficit for the current year becomes “unavoidable”. Edited excerpts:
RBI has emerged as the first line of defence against Covid-19, and some may say, the only line of defence. Do you think more fiscal measures are needed for the relief package to be effective? Also, what is your advice to the government? Should they suspend FRBM or monetise deficit?
Fiscal measures are important and the government is working on a package of measures. I expect that the government will take a judicious and balanced call on the question of fiscal deficit, while addressing the Covid-19 challenges.
The government has taken measures to contain expenditure, like freeze on its employees’ dearness allowance; it has also announced a relief package to support the vulnerable and disadvantaged sections. Through measures like in-kind support (food grains), cash support, DBT support or depositing money in Jan Dhan accounts, it has committed to spend 0.8% of GDP. So, therefore, meeting the fiscal deficit target of 3.5% this year is going to be very challenging, and going beyond it becomes unavoidable.
Will the RBI monetise the government deficit and will you look at private placement of gilts on your books, given that everybody realises that the only solution is to expand the RBI’s balance sheet? Some of the former governors have also said this may not be a bad thing to do.
There is an animated public discourse around this subject. Within the RBI, the debate is not new, and governors before me have had to contend with it. In fact, dealing with this issue has produced some landmark reforms like the phasing out of ad hoc treasury bills, the enactment of FRBM Act, the monetary policy framework, to name a few. To illustrate, ad hoc treasury bills were phased out over a three-year timeframe to facilitate a smooth transition to market borrowing.
Could Covid-19 bonds, which may be long maturity bonds that the government places with RBI, be an option?
We have not taken any view on the subject. When the time comes, we will take a judicious and balanced view, keeping in mind the parameters I set out earlier.
Were you surprised that banks did not participate in the TLTRO 2.0?
We had a sense that the response may not be as good as TLTRO, despite the additional incentives such as exemption from being reckoned as adjusted net bank credit. The auction results convey a telling message, which is that the banks are not willing to take on credit risk in their balance sheets beyond a point.
Would that mean a move to more general liquidity tools like LTROs or TLTROs?
That I cannot say, but the underlying challenge of ensuring flows to the mid-sized and small-sized NBFCs and microfinance institutions, that underlying challenge still remains. That is an issue that is very much on our table. We will take further measures as necessary to address that challenge. The RBI remains in battle-ready mode.
There are many parallels drawn between 2008 and 2020. While 2008 was more a financial sector problem spilling over to the real sector, this time it is a real sector problem which is being addressed through financial sector. Would you acknowledge that the role the RBI can play is limited?
The central bank’s role should not be underestimated. Monetary policy, liquidity management, financial regulation and supervision are powerful tools and are known to have lasting effects on economic and financial conditions. That said, we are dealing with a pandemic superimposed on a slowdown. The response has to be a coordinated one, with all arms of public policy as well as other stakeholders in the economy pulling together and working in close cooperation. Obviously, the government has a very important role in the response to the crisis.