EX-RBI deputy gov warns against deficit financing

MUMBAI: Former central banker Viral Acharya warned against the Reserve Bank of India monetising the government’s budget deficit, citing risks to inflation and external sector stability.

“Adopting this approach is also deeply flawed,” according to excerpts from Acharya’s soon-tobe-released book: Quest for Restoring Financial Stability in India. It “would mean regressing to errors of the 1970s and 1980s.”

Acharya, who resigned last year after raising concerns about the central bank’s independence and the health of state-run lenders, was referring to experience of the past when the RBI’S monetisation of government debt led to a spike in consumer prices and a balance of payments crisis. The RBI’S mandate is to keep inflation within a band of 2%-6%.

While India’s Fiscal Responsibility and Budget Management Act prevents RBI from buying bonds directly from the government in the primary market, calls have been growing to get the RBI to do so using a provision in the law that allows such an action in the event of the country facing a national calamity or a severe slowdown. With the Covid-19 outbreak presenting that opportunity, Acharya said this could lead to financial repression in the economy. It could also fan fiscal and current-account gaps leading to a loss in investor confidence.

“Such risk has materialised unexpectedly at least once a decade over the past 30 years with s e veral minor hi c c ups i n between. History tells us that we ignore this risk at our own peril,” he wrote.