RBI Governor Warned on downsides to direct financing of Govt’s deficit: Current affairs Special Series

Team Adda247 and BankersAdda are here with a Current Affairs Special Series. In this series, candidates will be introduced to current affairs topics daily, which will not only improve their general awareness but also will ensure that the candidates do not lack in any current affairs topic. Today’s Current Affairs topic is RBI Governor Warned on downsides to direct financing of Govt’s deficit.

RBI Governor Warned on downsides to direct financing of Govt’s deficit

According to RBI governor Shaktikanta Das, direct financing or monetisation of the government’s fiscal deficit by the central bank has several downsides. For creating money to finance the deficit, this may be done away with as part of the economic reforms and it was further refused to recognize when the FRBM Act was enacted. 

Shaktikanta Das directed that the RBI’s role as the government’s debt manager had helped to fasten the process of monetary policy transmission during the pandemic as lower as funding rates co-existed with plenty of liquidity. He also firmly refused the sustained focus of RBI on yield-curve control was impacting its focus on inflation and repeated that it was only interested in an orderly evolution of the yield curve. 

RBI has never had any fixed judgement that the yield should be 6%, but some of our actions might have conveyed that impression said by the RBI governor. RBI is only interested to develop the yield curve in an organised way and market expectations seem to be meeting with this approach. 

RBI has recently set a cut-off of 6.10% on a new 10-year paper after trying to keep the benchmark 10-year bond yield around or below 6% in recent months. Governor also states that the current high levels of retails inflation are transitory and influenced by supply-side factors and should be controlled in the third quarter. Retail inflation had rise less than expected in June but stayed above the RBI’s mandated 2%-6% target band for a second straight month. The signing of moderation in prices has raised the hopes of the central bank to keep policy accommodative for longer to support an economy hit hard by two strong waves of Covid-19 infections. 

Governor Mr Shaktikanta Das has alerted to watch transitory effects in nature very carefully because any hurried or hasty action could completely pull down the economy, at a time when the revival is nascent and hesitant.