Economics • Indian EconomyHard
Examine the statutory framework of the 'Fiscal Responsibility and Budget Management' (FRBM) Act, 2003. Which key reform was introduced regarding the central bank's financing of government deficits?
A. Mandated the Reserve Bank of India to purchase unlimited government treasury bills to finance fiscal deficits
B. Prohibited the Reserve Bank of India from subscribing to primary issues of central government securities after April 2006, except under specified emergency conditions✓ Correct Answer
C. Empowered commercial banks to write off sovereign debt without parliamentary approval
D. Transferred all public debt management responsibilities directly to the Comptroller and Auditor General
💡 Solution & Explanation
A landmark provision of the FRBM Act, 2003, was ending the practice of automatic monetization of budget deficits by prohibiting the Reserve Bank of India from participating in the primary auctions of central government securities starting April 2006, thereby strengthening central bank autonomy in monetary management. Other options suggest unlimited deficit financing or debt transfers that violate fiscal prudence. This reform reinforced the separation of monetary and fiscal policies.
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