RBI's OMO is monetisation of debt: Economists

'Inflation fears could cap liquidity thrust by RBI'

The government has pegged its market borrowings at over Rs 4.5 lakh crore for this fiscal to fund widening fiscal deficit, pegged at 6.8 per cent of GDP. Since there are apprehensions that it would jack up interest rates and leave little resources for pr ivate sector, the RBI may resort to open market operations to inject liquidity in the system.

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The Finance Ministry said open market operations should not be confused with monetisation of public debt, which means that the RBI would directly subscribe to government bonds.

Pointing out that OMO's are not monetisation of public debt, Chief Economoic Adviser Arvind Virmani said in the US also Federal Reserve has resorted to buying govt securities to deal with the crisis.

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However, many economists do not agree to this view.

"It (OMO) is in a way monetisation of debt. The RBI is buying securities and putting cash in the system. It has all the effect of monetisation," rating agency Crisil Principal Economist D K Joshi said.

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"They (federal reserve) done it to increase the money supply. Is that monetisation of federal debt?" he asked. Expressing the same view, former Chief Economic Advisor Shankar Acharya said it is monetisation of debt. "Yes, it is," he said when asked i f the RBI's open market operations is monetisation of debt.

An economist from a leading bank, requesting anonymity said, OMO is not monetisation of debt. However, in a way it is monetisation because they are putting money into the system. Amid ballooning fiscal deficit, the government had categorically said it h as "no intention" to monetise its debt, which implies that it will not directly borrow from the RBI.