Let us see what increasing expenditure by running down RBI reserves implies. The government does not have to use the RBI’s reserves; it can simply augment the fiscal deficit whose effects would be no different from using these reserves. But is the government’s desire to use the RBI’s reserves, rather than a fiscal deficit, for increasing its expenditure, a matter merely of theoretical misunderstanding? Not really, because globalized finance may not notice the use of RBI reserves, and be as upset with it as it would be with a fiscal deficit. Using RBI reserves, though effectively no different from a fiscal deficit, constitutes a form of ‘window dressing’.

Source: The Telegraph January 09, 2019 03:33 UTC