Monetising fiscal deficit could lead to credit bust: Economist

Monetising fiscal deficit could lead to credit bust: Economist 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.

Bureau Report