Fortunately, on present reckoning, the magnitudes of the few pockets of vulnerability appear to be manageable without undue fiscal strain. In assessing fiscal financial linkage, the scope for money financing of budgets vis-à-vis bond financing also needs to be considered.
Since there are elements of open capital account, the maneuverability for RBI in the short-term to monetize government’s deficit is severely circumscribed by the direction and magnitudes of such flows. Keeping these considerations in view, RBI and Government have agreed upon freedom to RBI to determine the extent of monetization of government budget consistent with macro-economic stability.