Q. Which of the following statements is/are correct with respect to Monetized Deficit?
1. It leads to an increment in the net holdings of treasury bills by the Central Bank.
2. It leads to an increment in the money supply in the economy.
Select the correct answer using the code given below:
Monetised Deficit
Deficit financing is when a govt spends more than what it earns Monetized deficit refers (quantum of deficit financing) where the government (here RBI) prints more money in order to pay its deficits This is not in proportion to wealth or capital formation in the economy Since the enactment of the FRBM Act 2003, deficit financing is not practiced in India In other words, a monetized deficit means the increase in the net RBI credit to the central government, such that the monetary needs of the government could be met easily
The monetized deficit results in the increase in the net holdings of treasury bills by the RBI (which is raised through Open Market Operations) and also the RBI contribution towards the government’s market borrowings increases
With the issue of more money to the government (not being backed by assets), the money supply in the economy increases, as a result of which the inflationary pressure prevails
Source: Ramesh Singh
