WHAT IS MONETISED DEFICIT

Monetised deficit is the monetary support the Reserve Bank of India (RBI) extends to the Centre as part of the government's borrowing programme. In other words, the term refers to the purchase of government bonds by the central bank to finance the spending needs of the government.

 

Also known as debt monetisation, the exercise leads to an increase in total money supply in the system, and hence inflation, as RBI creates fresh money to purchase the bonds. The same bonds are later used to bring down inflation as they are sold in the open market. This helps RBI suck excess money out of the market and rein in rising prices.