| Monetized deficit means: |
| 1. Borrowings made from the RBI. |
| 2. It is resorted to when the government finds it difficult to borrow from the market. |
| Which of these statements is/are correct? |
A) Only 1
B) Only 2
C) Both 1 and 2
D) neither 1 nor 2
Correct Answer: C
Solution :
[c] Monetized deficit Also known as the 'net reserve bank credit to the government', it is that part of the government deficit which is financed solely by borrowing from the RBI. Since borrowings from the RBI can be both short-term and long-term, therefore, monetized deficit is the sum of the net issuance of short-term treasury bills, dated securities (that is, long-term borrowing from the RBI) and rupee coins held exclusively by the RBI, net of Government's deposits with the RBI. This is different from the Traditional Budget deficit in two ways- 1. Traditional Budget deficit includes 91-day treasury bills held by both, the RBI and non-RBI entities whereas Monetized deficit includes 91-day Treasury Bills held only by the RBI. 2. Traditional Budget deficit includes only short-term sources of finance whereas Monetized deficit includes long-term securities also. Monetization of deficits, which increases the money supply, is inflationary if the rate of growth of money supply is greater than the rate of increase of the demand for cash balances arising from the growth of the economy. Thus, monetized deficits are an important indicator of the inflationary impact of the increase in government's budgetary deficits.
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