Improve rules for fiscal regime: RBI
A combination of factors ranging from large fiscal deficit to suppressed inflation and debt dynamics have ensured that the fiscal dominance of the monetary policy continues to persist. Making this observation, the “Report on Currency and Finance, 2011-12 on fiscal-monetary co-ordination’’ released by the Reserve Bank of India (RBI) pointed to new challenges that had emerged in the recent past for its monetary policy initiatives.
The report said large market borrowings to fund high fiscal deficits had, at times, led to de facto monetisation of the deficit. Added to this was the inflationary potential of such a large deficit. The pro-cyclicality of government spending and deficit-debt dynamics had only put extra pressures on the monetary policy, the report said. The Indian experience, according to the report, suggested that fiscal rules, though necessary, weren’t sufficient to optimise the outcomes of the fiscal-monetary co-ordination.