India most in need of debt monetisation: Nomura report
India was the most in need of debt monetisation to share the fiscal burden of its pandemic response when compared to other major Asian economies, according to a Nomura report on Friday.
However, its ability to conduct debt monetisation was ranked at the lower end of the comparison of eight emerging market economies, including China, Indonesia, Malaysia, Philippines, South Korea, Thailand and Taiwan.
“Our aggregate scorecard ranks India and Indonesia on top as the most likely candidates to implement debt monetisation. These two economies rank high on the need scores, reflecting their high vulnerability to COVID-19, steep yield curves and high public debt (India),” Nomura said.
“However, these countries rank near the bottom in our ability scorecard, reflecting higher (relative) concerns about currency depreciation (current account deficit), government effectiveness (proxy for credibility) and inflation (India),” it added.
The gap between the need and ability scores indicated a significantly higher risk associated with debt monetisation for India, the report said.
While economic affairs secretary, Tarun Bajaj, said the move was firmly off the table for now, during a virtual conference last month, reports suggested the government will consider monetising the deficit to a certain extent in the second half of the fiscal.
According to the report, the hesitation of government’s was partly due that prohibited central banks from buying government bonds in the primary markets. However, for India, the escape clause in the Fiscal Responsibility and Budget Management Act enables the Reserve Bank of India to do just that.
“The Q2 GDP slump (in end August) may provide the trigger for one of the escape clause conditions: ‘a sharp decline in real output growth of at least 3pp (percentage point) below the average for the previous four quarters’,” the report said.
Before going ahead with the move, Nomura cautioned balance in the degree of monetisation. “If used in small amounts for productive purposes, risks can be managed, but when used in large doses for unproductive spending, this can have deleterious economic effects.”
Stagflation
In another note, Nomura said that the latest forward looking survey released by the Reserve Bank of India pointed to a troubling stagflationary outcome. While households expected inflation to rise to 10.5% in a year, consumer and business confidence remained weak, it said.
However, while stagflation risks may dominate in the short run, they are unlikely to be sustained. “Recent flattening in the mobility curve suggests that sequential growth is stagnating below normal after the initial business resumption, which should have a salutary effect on underlying inflation,” Nomura said.