Raghuram Rajan the Former Governor of Reserve bank of India said that the central bank has been expanding its balance sheet and buying government debt on the back of excess liquidity amid the economic slowdown but cautioned that it will come at a cost and would not be a lasting solution. He said that the Reserve Bank of India has been expanding its balance sheet through buying government debt. In this process, they are borrowing from the banks at the reverse repo rate and then lending to the government. After purchasing $40 billion in sovereign bonds by Indonesia central bank from the national government to monetize debt, it is said by an Indian government official to The Indian Express that India too should not close this option. Rajan said that for monetization there is a limit and the process can go only for a particular period. He also included that it should be discussed in detail that its impact on inflation, currency market, and debt sustainability by the administration, the report cited the official. If it happens it will be the first time when the Reserve Bank of India (RBI) will buy debt directly from the Ministry of Finance so far the RBI buys debt through open market operations.
Raghuram Rajan also revealed the reason, why the at low earnings the banks are parking money with Reserve Bank of India in the reverse repo window. Raghuram Rajan said that when people start fearing about the extend of monetization that is going on, once growth starts picking up and banks find more borrowers, start worrying about debt and inflation, then the government debt financing process will have to stop. Raghuram Rajan said that when the economies like India fully open up, a lot of damages wrecked as the lockdown resulted will be uncovered. This cost will be transferred to the financial sectors. The government must ensure that lenders are adequately capitalizing to tackle the situations and should never let this slip into becoming a financial sector problem. So we have to manage to put the economy into a coma. But when they awaken it is going to be overly optimistic to assume everyone will walk from the sleeping bed and will come back to their life. No sooner the China and the US will take leadership and smaller democracies can pursue the two big powers of the world to come together. He also hoped that the upcoming presidential election in the US will change the course of things.
