There is no need for RBI to directly pay the government for its bonds; that is monetization.
It can however buy bonds from the market, and the govt can issue bonds to the market. RBI has done this consistently for the last 10-20 years.
It can however buy bonds from the market, and the govt can issue bonds to the market. RBI has done this consistently for the last 10-20 years.
This is also how the west does it. The central banks buy from the market, the government issues new bonds. India's govt debt to gdp is MUCH smaller than any of these nations, and they have tiny interest rates because of central bank action.
If the RBI kept long term interest rates at 4% or even at repo (4.4%) by buying gsecs, India's fiscal deficit would fall hugely. Because the govt pays over 500,000 cr. in interest alone! Interest cost is nearly 60% higher than the next highest category of expenditure: defence.
India doesn't actually need to monetise. RBI can give the govt 400,000 cr. this year as a dividend and still have 20% equity on its balance sheet (compared to 1% in the US etc.) which meets Jalan committee guidelines. capitalmind.in/2020/04/how-th…
But the RBI SHOULD buy gsecs to ensure that rates fall for corporates and for bond markets. This is inline with how the world does it.
