Covid-19 spiking govt’s debt-to-GDP ratio: RBI

Reserve Bank of India Governor Shaktikanta Das on Saturday warned that global public debt may reach 100% of GDP in 2020. With India being no exception, he said maintaining financial stability will be RBI’s topmost priority, implying the RBI may not be overly concerned about inflation going forward if economic growth demands a bigger push.

“In the Indian context, maintaining financial stability remains one of the uppermost objectives of the Reserve Bank, drawing from its wide mandate as the regulator of the banks, NBFCs and payment systems; regulator of the money, forex, government securities and credit markets; and also as the lender of the last resort,” Das said, delivering the 39th Palkhivala Memorial Lecture in Mumbai.

Das said since the global financial crisis (GFC) of 2008, financial stability has featured even more prominently in the discourse of central banks. It has been well documented that central banks in many countries were narrowly focused on price stability (inflation control) and perhaps overlooked the build-up of financial instability during the great moderation period.

His statement comes ahead of February 4 monetary policy, when high inflation may require the central bank to hold interest rates but slowing economy may demand the opposite.

Certain independent economists also interpreted his statement as his willingness to monetise the government’s debt if it reaches 100% of GDP. Debt monetisation is nothing but the central bank buying the government’s debt. It does that by printing money.

In a bid to maintain financial stability, Das also emphasised the need for banks to raise resources in advance as a buffer.

Going ahead, he said, financial institutions in India have to walk a tightrope in nurturing the economic recovery within the overarching objective of preserving long-term stability of the financial system.

He said the current Covid-19 pandemic-related shock will place greater pressure on the balance sheets of banks in terms of non-performing assets, leading to erosion of capital.