Consider the following statements:
Statement-I
Direct monetisation by the Reserve Bank of India (RBI) can be inflationary in the economy.
Statement-II
RBI prints new currency in return of new bonds issued by the government similar to open market operation in direct monetisation.

Which one of the following is correct in respect of the above statements ?
(a) Both Statement-I and Statement-II are correct and Statement-ll explains Statement-I
(b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
(c) Statement-I is correct, but Statement-II is incorrect
(d) Statement-I is incorrect, but Statement-II is correct

Question

Consider the following statements:
Statement-I
Direct monetisation by the Reserve Bank of India (RBI) can be inflationary in the economy.
Statement-II
RBI prints new currency in return of new bonds issued by the government similar to open market operation in direct monetisation.

Which one of the following is correct in respect of the above statements ?
(a) Both Statement-I and Statement-II are correct and Statement-ll explains Statement-I
(b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
(c) Statement-I is correct, but Statement-II is incorrect
(d) Statement-I is incorrect, but Statement-II is correct

ONLiNE UPSC · Accepted Answer

Statement-I is correct: Direct monetisation refers to the RBI printing new currency to directly purchase government bonds.It is rarely used method financing the government's deficit directly by creating money.This increases the money supply in the economy without a corresponding increase in output, which can lead to demand-pull inflation.This is why it's usually used only in emergencies (during war, pandemic) and not for regular deficit financing.

Statement-II is not correct: In direct monetisation, the government issues bonds, and RBI purchases them directly, not through the market. To do this, RBI creates new money (prints currency) and gives it to the government.This is different from open market operations (OMOs) where RBI buys bonds already in circulation.

Monetary Policy

Direct Monetisation by RBI

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M Question 1	⏱ 0
Consider the following statements: Statement-I Direct monetisation by the Reserve Bank of India (RBI) can be inflationary in the economy. Statement-II RBI prints new currency in return of new bonds issued by the government similar to open market operation in direct monetisation. Which one of the following is correct in respect of the above statements ? (a) Both Statement-I and Statement-II are correct and Statement-ll explains Statement-I (b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I (c) Statement-I is correct, but Statement-II is incorrect (d) Statement-I is incorrect, but Statement-II is correct

Monetary Policy

Direct Monetisation by RBI

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