Why RBI doesn't agree with idea of printing money

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Why RBI doesn't agree with idea of printing money

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• To print or not to print: Nobel laureate Abhijit Banerjee wants government to print money to finance the fiscal deficit. That can help give a big fiscal boost to an economy ravaged by Covid-19. Most experts have disagreed, and the RBI too (it has the sole right to print money in India).
• Infusing money in system: RBI infuses money in two generic ways -

1. It buys dollars from the market and infuses rupees in return (this is part of Sterilisation process). Its balance sheet expands, through foreign currency assets.
2. It buys govt. bonds from the secondary market and pumps in liquidity in return (this too can be a part of Sterilisation process, or otherwise also). Its balance sheet expands, through domestic assets.

• Indirect and direct ways: 

1. Indirect financing - In the second method where it buys bonds from secondary market, it indirectly finances the government's fiscal deficit. 
2. Direct financing - The direct way of financing deficit is when govt. privately places bonds with the RBI. India had this system till 1997, where ad-hoc Treasury Bills were placed with the RBI (issued by RBI on behalf of Centre, to itself, at a fixed rate).
3. RBI is the merchant banker of govt. of India, managing entire funds raising programme. It is the one issuing bongs to banks, to raise such funds. So in direct financing, RBI subscribes the bond issues it made.

• Same demand now: Since the economy is in a bad shape, same is being demanded again - automatic monetisation of deficit. This is also called "helicopter dropping of money", as per Milton Friedman in 1969.

1. RBI became growth-oriented in monetary policy, after the 2020 shock to India's GDP, and kept Repo Rate at a low 4%. It couldn't go down any more due to inflation concerns. (FY 21 - retail inflatio 6.2%, FY22 - may be 5%)
2. In April 2021, RBI brought the GSAP, to buy government bonds from secondary market. In GSAP 1.0, RBI bought bonds of Rs.1 lakh crore, and in GSAP 2.0, worth Rs.1.2 lakh crore (including state govt. bonds). [GSAP - Govt. Securities Acquisition Programme]

• GSAP: Logic given is that the GSAP is about printing money and buying bonds, so economic stimulus is happening. So why go for direct purchase of bonds at all? GSAP is nothing but Quantitative Easing (QE) via OMOs (open market operations). The 1997 move to end private placement of bonds (direct financing) was to bring discipline to govt. finances.
• FRBM target: India has had the 3% fiscal deficit target for long now. The elimination of the private placement of bonds (= note printing = direct monetisation of govt. deficit) was precisely to control fiscal deficit, which hasn't been achieved yet.
• RBI and government's borrowing: In 2020-21, the RBI borrowed Rs.12.8 lakh crore from the market, at lowest rates in 16 years. For 2021-22, its target is Rs.12.05 trillion. Poor GST collections may push it up. 

1. The 10-year G-Sec yield is around 6% since April 2021's GSAP (so RBI's claim that borrowing costs are under check)
2. RBI said that since it managed the borrowing programme for centre and states nicely, there's no need to print money today. 

• Summary: The RBI is in no mood to 'print money' (= private placement of bonds) though that is what it is doing indirectly.

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