When central banks conduct open-market operations (OMOs), driven by a need to provide liquidity to support government borrowing or reduce yields rather than for liquidity management, it “becomes a case of acquiescence in fiscal dominance”, Reserve Bank of India (RBI) governor Duvvuri Subbarao said on Wednesday.“There is often only a thin line, and the interpretation of the motivation for outright OMOs could vary depending on the circumstances,” Subbarao said while addressing the RBI’s Second International Research Conference 2012.Cautioning the government against excessive borrowing, Subbarao urged it to put a cap on the public debt as it would hurt growth.“There is an inflection point beyond which fiscal deficit militates against growth. Government borrowing is not bad per se, but excessive borrowing is. There is, therefore, a need to cap total public debt as a proportion of the GDP, ” he said.
Source: Financial Express
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