Context

Amid Ukraine crisis and high oil prices, the larger concern is how the government and the RBI will navigate this period at a time of record government borrowings, and prevent domestic interest rates from hardening.

The Triffin paradox in current context

• It is ironic that even as emerging economies running current account deficits are getting punished by a depreciating currency and a hardening of interest rates, we are witnessing the US dollar appreciating and US treasuries strengthening.
• The most common argument for such a macroeconomic paradox is named after the economist Robert Triffin (the Triffin Paradox).
•  It postulates that the US current account deficit is purely a reflection of the US supplying large amounts of dollars to fulfil the world’s demand.
• In other words, central banks across the world must build up claims on the US to back their domestic money growth.

Dollar’s dominance

• Former US Federal Reserve Chairman Bernanke even extended this argument in 2005 to the “saving glut” proposition by espousing that emerging economies were accumulating foreign exchange reserves in dollars, and diverting domestic savings to buy US treasuries.
• There are several counter arguments to this view that effectively state that the dominance of the US dollar is inevitable in the global financial architecture, and it is purely a fault of emerging market economies.

Need for the unconventional tools to avoid the disruption by government borrowing

This can be done in the following ways

1] Spread the borrowing over four quarters after taking real-time view of disruption

• Every year, the government front-loads its large borrowing programme by completing 60 per cent of the borrowings in the first half of the year.
• This time, the RBI and the government may take a real-time view of disruptions and spread the borrowings over four quarters, keeping the initial two quarters light.
• The borrowing programme can also be announced as per a quarterly schedule and there could be even two auctions during the week.
• These steps could smoothen out the non-disruptive elements in government borrowings.

2] Reconfigure the borrowing program

• For example, as rates move up, banks tend to prefer short-term investments while insurance companies, provident funds and others prefer longer-term investments.
• Given this, the borrowing schedule can be reconfigured with a higher proportion of short-and medium-tenor securities being offered in the initial months, while pushing back the longer tenor securities to the second half of the year.

3] Push Small Savings Schemes

• Third, small savings collections have significantly exceeded budget estimates.
• The government could think of giving a push to small savings schemes such as the Sukanya Samriddhi Yojana (SSY).
• The SSY has witnessed the registration of 2.82 crore girl children in the seven years since its inception in 2015, leaving enough room for further mop-up.
• The newly opened accounts may even be given an enhanced savings limit in the first year to catch up for the years lost for these new additions.

4] Listing of LIC

• LIC currently holds around Rs 23.5 trillion worth of government bonds, higher than even than the RBI.
• LIC’s G-sec holding is around 19 per cent, while in comparison the banking system’s ownership stands at around 38 per cent.
• Thus LIC’s listing should augur well for the bond market as the insurance behemoth may have to deploy a greater share of inflows in safer avenues domestically.
• This is a plausible option as banks may have to readjust their deposits into credit as the economic recovery gains momentum.

Conclusion

Rising oil prices have placed policymakers in an unenviable position. If higher oil prices are fully passed through, it will result in higher inflation and hence higher rates as a consequence.  In such a scenario it is best to follow the first option by using unconventional policy measures.

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