A Pointless Debate Over India’s Reserve Bank Printing Money

Context: Analysing the pros and cons of printing money to revive economy.

Different ways through which RBI intervenes

• Way and Means advances (WMA): After 1997, automatic financing of the budget by RBI through the system of issuance of T-bills was replaced with WMA, which provided funds to meet temporary mis- matches in revenue.
• Open Market Operations (OMO): Denotes and indirect financing of budget within legitimate tools of monetary policy, OMOs let RBI to buy/sell G-sec and maintain liquidity and indirectly finance budget.
• In private sector: RBI already had various schemes like its long-term repo operations (LTRO), targeted LTRO, its more novel covid bank loan book and special LTRO.

Arguments in favour of printing money

• Upholding Keynesian economics spirit: And would be driven by government spending the money.
• Additional surplus in banking system: Banking system had surplus daily liquidity averaging Rs 4.12 trillion that went into RBI’s overnight reverse repo window, with earnings of just 3.35%.
  • G-Secs with an average yield of even 6% would have absorbed this for a better return.

Arguments against the suggestion to print money

• Official view that economy is not in very bad shape: And the second wave-induced regional lockdowns will not push the economy back, except temporarily.
• Expenditure side constraints: In 2020-21, the expanded fiscal deficit was more on account of a decline in revenues, including disinvestment, and an increase in relief rather than capital expenditure.
  • While fiscal deficit moved from a budgeted Rs 7.96 trillion to Rs 18.21 trillion (accounts), capital spending increased by just Rs 13,000 crore.

Conclusion

• Funding is not an issue: As the central bank has already shown, it can manage liquidity and interest rates in a non-obtrusive manner. The government has to decide whether it stands to raise capital expenditure leveraging the current economic position.