MONETIZATION OF DEFICIT (Economic Times, The Hindu-GS-3)

➢ If the expenditure of the government exceeds its income, the government is said to have incurred a fiscal deficit. This deficit financing has to be done either by borrowing from the market or monetisation of deficit through RBI.
➢ In simple words, monetization of fiscal deficits involves the financing of such
extra expenses with money, instead of debt to be repaid at some future dates.
So, it is a form of “non-debt financing”. As a result, under monetization, there
is no increase in net (not gross) public debt.
It can occur only through one of two modalities:
➢ Direct Monetization (DM): Under this method, RBI prints new currency and
purchases government bonds directly from the primary market (from the
government) using this currency. As a result, this supports the spending needs of
the government.
➢ Indirect monetization (IM): In this method, deficits are monetized as the
government issues bonds in the primary market and the RBI purchases an
equivalent amount of government bonds from the secondary market in the form
of Open Market Operations (OMOs).


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