Economics • Indian EconomyHard

Examine the statutory framework of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. Which key structural reform was introduced regarding central bank financing of government deficits?

A. It mandated that the Reserve Bank of India must finance 100 percent of the central government fiscal deficit through direct monetization

B. It prohibited the Reserve Bank of India from subscribing to primary issues of central government securities after April 2006, ending automatic monetization✓ Correct Answer

C. It authorized commercial banks to set their own statutory liquidity ratios independently of central bank oversight

D. It transferred the administration of foreign exchange reserves entirely to commercial lending institutions

💡 Solution & Explanation

The Fiscal Responsibility and Budget Management Act, 2003 prohibited the Reserve Bank of India from participating in primary auctions of central government securities from April 1, 2006, effectively terminating the practice of automatic monetization of budget deficits. This reform insulated monetary policy management from fiscal pressures and enabled the central bank to focus squarely on price stability. Ways and Means Advances mechanisms replaced direct deficit monetization to manage temporary cash flow mismatches for the government. Fiscal discipline targets under the act have undergone periodic revisions.

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Examine the statutory framework of the Fiscal Responsibility and Budget Management (FRBM) Act, 2003. Which key structural reform was introduced regarding central bank financing of government deficits?

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