The government of India issues financial securities known as government securities or government bonds, in order to finance its fiscal deficit or the difference between what it earns and what it spends.
Banks, insurance companies, non-banking finance companies, mutual funds, and other financial institutions, buy government securities/bonds. Some are mandated to do so, others do it out of their own free will.
Among other things, the RBI is also the debt manager for the central government. It manages the government’s borrowing program. After borrowing Rs 12.8 lakh crore in 2020-21, the government is expected to borrow another Rs 12.05 lakh crore in 2021-22. Due to the covid-pandemic and a general slowdown in tax revenues over the years, the government has had to borrow more in order to finance its expenditure and the fiscal deficit.
This information of the government having to borrow more than Rs 12 lakh crore again in 2021-22, came to light when the annual budget of the central government was presented on February 1. Due to this higher borrowing, the bond market immediately wanted a higher return from government securities.
While money printing helps the central government borrow at lower rates, it hurts the middle class and the poor, who invest in fixed deposits and other forms of fixed-income investments to save money. It needs to be remembered that most Indians save by investing in fixed deposits, small savings schemes, provident and pension funds, and life insurance. In 2019-20, 84.24% of the household financial savings were made in these financial instruments. Low-interest rates largely mean lower returns from these investments. Lower interest rates, hurt especially when the rate of inflation is as high as the interest rates on offer.
The money printing by the RBI to drive down interest rates is likely to continue in the months to come. The Indian central bank is expected to print Rs 1 lakh crore during April to June . This means that bank interest rates will continue to remain low, continuing to hurt the middle class.
By printing money and pumping it into the financial system, the RBI ensures that the money that financial institutions have is available for lending for the long term.
Like the disease itself, the negative economic effects of covid, especially among the poor and the middle class, will continue to be felt in the years to come.