Monetising fiscal deficit could lead to credit bust: Economist

Last Updated: Tuesday, August 4, 2009 - 22:18

Mumbai: The Reserve Bank of India must desist
from any move to monetise the burgeoning fiscal deficit as it
could lead to credit boom followed by a likely bust, a top
economist warned.

"Unless public is willing to hold substantially more
money, monetisation to fund government deficit will cause
serious inflation and raise real interest rates," former IMF
Chief Economist Raghuram Rajan said during a lecture here.

If the central bank is restrained in such a scenario,
there could be a credit boom and a likely bust, he added.

India`s fiscal deficit increased to 6.8 per cent of
GDP after a series of stimulus packages to revive the slowing
economy while government borrowing surged to a whopping Rs 4
lakh crore.

"RBI should distance itself more from government to
preserve credibility (and) shed responsibility for managing
the government can suffer substantial loss of
creditability if it monetises its (deficit)," Rajan said.

The government needed substantial resources to fund the
deficit and the competition for resources could lead to an
increase in the real rate of interest.

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First Published: Tuesday, August 4, 2009 - 22:18

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