Article;
RBI will take action including OMOs to ensure liquidity.
Comment;
OMO is expected to
reduce interest rates on govt. bonds… But why the RBI wants to lower yields on
the govt. bonds when fiscal deficit is already high. Buying govt. bonds will,
no doubt, increase liquidity to the system but that will also increase
inflation and inflationary expectations because govt. will borrow more and will
spend more... Therefore, this is inflationary not only due to monetary policy but
also due to fiscal policy… The purpose of the OMOs is to reduce yields on govt.
bonds so that the govt. can borrow more, but, high fiscal deficit have been a
major a concern since the govt. expenditure has been high due to the stimulus
provided following the Great-Recession. Even our FM admits that many of the
stimuli provided during the recession have not been rolled back which has not
only weakened the revenue scene but has also built demand pressure resulting in
high inflation. OMOs will definitely release liquidity in the system but that
will also push-up already elevated demand and prices…
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