Debt monetisation: Indonesia plans to buy $40 billion in sovereign bonds, FinMin says open to concept

Sources said the Centre is preparing the next set of measures that would be required to support economic activity. These measures are likely to be announced from beginning of September. While fundraising through asset sales and offer for sale route for selling equity shares in state-owned companies are among the measures to shore up non-tax revenues, direct monetisation by selling bonds to the Reserve Bank of India (RBI) is another way of raising additional funds at lower cost.

“The government had announced a Rs 20 lakh crore of package to address various needs of the economy in the first round. Now nobody knows for how long this pandemic will last. As the information relating to various aspects of the economy comes in, we are trying to provide relief within the constraints. The government is expected to respond, by people and industry, by giving something more than you already have,” another official said, indicating that next set of measures are being worked out.

“There is a view that rating agencies will react to further jump in fiscal deficit, but there is also a counter view that strategies deployed to boost growth through higher spending will be taken positively. These are constraints within which we are studying various options,” the official said. Amid rising debt levels and falling revenues, monetisation could be one way of supporting government’s spending plans but it could have negative implications on inflation, currency and any possible reaction by rating agencies. Finance Ministry officials did not respond to queries seeking comments for the story.

Monetisation simply means that the RBI directly funds the central government’s deficit. Until 1997, the government used to sell securities — ad hoc Treasury-Bills — directly to the RBI, and not to financial market participants. This allowed the government to technically print equivalent amount of currency to meet its Budget deficit.

Among emerging markets, Indonesia last month announced a plan of direct monetisation totalling $40 billion to its central bank. These funds are being raised to support funding for health care, food security and provide a stimulus package for small and large companies. In India, while the RBI provides support to the bond market through its open market operations in the secondary market, it does not monetise the government’s deficit. A report by SBI economic research team Monday recommended direct monetisation as a plausible way of funding the Centre’s deficit at lower rates without increasing inflation and affecting debt sustainability. Many economists have suggested this as a means to support the economy in these times of slump.