Mumbai: When central banks conduct open market operations (OMOs) driven by a need to provide liquidity to support government borrowing or reduce yields rather than for liquidity management, it "becomes a case of acquiescence in fiscal dominance," India's central bank chief said on Wednesday.
"There is often only a thin line, and the interpretation of the motivation for outright OMOs could vary depending on the circumstances," Reserve Bank of India Governor Duvvuri Subbarao told a conference.
On Tuesday, the RBI said it will buy up to Rs 100 billion of government bonds via open market operations on Friday.
"In the presence of large sovereign borrowing that makes the government's fiscal stance unsustainable, central banks typically have little choice. If they do not conduct OMOs to bring systemic liquidity within reasonable limits, they risk losing control over financial stability," he said.
Bureau Report
First Published: Wednesday, February 01, 2012, 11:14