If necessary, Govt could use FRBM escape clause: Former RBI Deputy Governer

New Delhi: Former Reserve Bank of India (RBI) governor Usha Thorat said if necessary the government could use the escape clause in the Fiscal Responsibility and Budget Management (FRBM) Act which allows the central bank to monetise deficit.

“There should be a balanced use of all instruments, issuing paper into the market, using the primary dealer system, doing open market operations and then, if necessary, and there is no reason why the escape clause in the FRBM cannot be utilised to do private placement, which means primarily the government debt is then absorbed by the RBI and then over some time the RBI sells those securities in the market,” Thorat said at a webinar organised by the National Council for Applied Economic Research on Friday.

The RBI, along with the government, would have to ensure the additional borrowing programme does not put pressure on bond yields, said Thorat. She said there should be a little more incentive to primary dealers to underwrite the auctions, then the involvement of the RBI to that extent can be minimised.


“So use the primary dealership system, use the auction route to see how the market is able to absorb this additional borrowing without putting pressure on yields and, if necessary, one can always intervene in the market through open market operations, absorb some of that government securities and keep the pressure on yields stable,” said Thorat.