"The high fiscal deficits forced the Central government to monetise (i.e. finance) the deficit. The government resort to borrowings from RBI in the form of deficit financing (that is, printing of new currency notes)." Why does the govt. borrowed new notes from RBI which eventually resulted in inflation?
Dear student,
In order to finance the deficit he government can borrow from other sources such as public or other international institutions. However, such a debt comes with the obligation of repaying the debt along with the interest rate.This in turn might out the government in a situation of debt trap.
The other way of borrowing is from the central bank (in the form of new currency notes). In this situation while there is no obligation to repay the debt but it proves to the inflationary.
In order to finance the deficit he government can borrow from other sources such as public or other international institutions. However, such a debt comes with the obligation of repaying the debt along with the interest rate.This in turn might out the government in a situation of debt trap.
The other way of borrowing is from the central bank (in the form of new currency notes). In this situation while there is no obligation to repay the debt but it proves to the inflationary.