India: Slipping back into bad habits? - Rabobank

Analysts at Rabobank note that for the Indian economy, in fiscal 2018/19, the RBI has been very active on the bond market, pumping more than INR 2800bn into the system by buying government bonds.

Key Quotes

“The RBI stepped up its effort, partly because investors have become more wary to buy government bonds, given the more prominent risk of fiscal slippage.”

“Although the role of the RBI in total government debt holdings is still relatively small, there are reasons to suspect that the RBI will continue its buying spree in fiscal 2019/20. First, any future government is planning to increase spending. Second, inflation has been low, which provides more headroom to monetise debt.”

“India has a notorious reputation of debt monetization in the past, but introduced several reforms to phase out these practices.”

“The current developments are a drop in the ocean compared to the quantitative easing programmes in the US, Europe and Japan, which came with substantial negative side effects. It remains tempting to scale up these kinds of monetary operations and the distinction between fiscal and monetary policy is easily blurred.”

“What the government should do, however, is implement reforms to make government funding more resilient and robust. In order to improve the revenue base, the government should focus on labour market and land reforms, as relatively strict regulations suppress productivity growth and the development of jobs in the formal sector.”