Fiscal Dominance: UPSC Daily Important Topic | 28 June 2022

Fiscal Dominance

Fiscal dominance occurs when central banks use their monetary powers to support the prices of government securities and to keep interest rates at low levels to reduce the costs of servicing sovereign/government debt. Fiscal dominance implies that Fiscal considerations limit the scope for an independent and prudent monetary policy.

The have posted the above term in the context of present situation that WPI is running in double digits since last 10 months and last month CPI has also crossed 6% but still RBI is not willing to increase the repo rate (and reverse repo rate) because it may lead to increase in interest rates and increase in cost of borrowing by the Govt. Recently RBI also scrapped the plan for issuance of Central government securities to raise debt (for govt.) in light of higher interest rate in the market.