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Raiding RBI's reserves not a credible way for government to cut fiscal deficit, says Montek Singh Ahluwalia

Updated : November 21, 2018 06:24 AM IST

Raiding the Reserve Bank of India (RBI) reserves is not a credible way for the government to reduce the fiscal deficit and that is actually an accounting trick, said Montek Singh Ahluwalia, former deputy chairman of planning commission.

"You can always get the RBI to transfer money but it has to control the total amount of money that it prints. So, if you take away more through this window then they will have to squeeze somewhere else. If they squeeze somewhere else it is the same thing as you are increasing your fiscal deficit and crowding out the private sector. So, it is not as if this is a free lunch that some calculation here will enable you to get a real resource that was lying unused, that is not actually true," Ahluwalia said.

Ahluwalia's comments came against the backdrop of the differences with RBI and the government on the issues such as easing the PCA framework for PSU banks, boosting liquidity and transferring additional surplus from the RBI to the government.

The transfer of RBI’s surplus reserves to the government to help bridge the fiscal deficit was one of the contentious issues between the two sides.

"If you take away a lot of money and give it to the government under whatever pretext and if the RBI maintains the stability that will just reduce the amount of reserve money that they issue into the rest of the system. So, the net effect from the government's point of view is not particularly different," Ahluwalia said.
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