India’s central bank chief warns of downsides in direct government deficit financing

MUMBAI (Reuters) – The central bank has several disadvantages in directly financing the government’s fiscal deficit or earning money, Shaktikanta Das, the governor of India’s Reserve Bank, said in an interview with the Financial Express newspaper on Thursday.

“This (creating new money to finance the deficit) ended within economic reforms … and they also refused when the FRBM Act was passed,” Das told the paper.

He added that the RBI’s role as the government’s debt manager helped speed up the pace of monetary policy transmission during the pandemic, as lower financing rates coexisted with plenty of liquidity.

Das denied that the RBI focused its attention on controlling the yield curve by focusing on inflation and reiterated that it was only interested in the yield curve in orderly evolution.

“We have never been able to establish that profitability should be 6%, but some of our actions may convey that impression. We are only interested in the orderly evolution of the continuous curve and market expectations seem to match this view.”

The RBI has recently implemented a 6.10% reduction on a new 10-year paper after trying to keep the yield on 10-year bonds at around 6% or below 6% in recent months.

Das also reiterated that current high levels of retail inflation are transient and are affected by supply-side factors and should be moderated in the third quarter.

Retail inflation rose less than expected in June, but remained above the target band of 2-6% mandated by the RBI for the second month in a row. Signs of price moderation have revealed that the central bank will maintain a more appropriate policy for a longer period of time to help the economy hit hard by the two strong waves of COVID-19 infections.

“What is transitory in nature must be looked at carefully. Any action taken in a hurry or in a hurry can bring the economy down completely, at a time when the recovery is beginning and uncertain,” he said.