Separately, Nomura warned of short-term stagflation risks for India. Stagflation refers to a high-inflation and low-growth situation.
“Our aggregate scorecard ranks India and Indonesia on top as the most likely candidates to implement debt monetisation. These two economies rank high on the need scores, reflecting their high vulnerability to Covid-19, steep yield curves and high public debt (India),” Nomura said.
Given India’s already high fiscal deficit, there has been vigorous debate over whether the country should monetise its borrowings, which is akin to printing money to meet the deficit.
Nomura ranked India’s ability to conduct debt monetisation at the lower end in its comparison of eight emerging market economies, including China, Indonesia, Malaysia, Philippines, South Korea, Thailand and Taiwan.
“However, these countries rank near the bottom in our ability scorecard, reflecting higher (relative) concerns about currency depreciation (current account deficit), government effectiveness (proxy for credibility) and inflation (India),” it added.
The gap between the need and ability scores indicated a significantly higher risk associated with debt monetisation for India, the report said.
Debt monetisation is firmly off the table for now, economic affairs secretary Tarun Bajaj said at a virtual conference last month.
The Fiscal Responsibility and Budget Management Act has an escape clause that enables the Reserve Bank of India to subscribe to primary borrowing by the government, which is essentially monetisation.
“The Q2 GDP slump (in end August) may provide the trigger for one of the escape clause conditions: ‘a sharp decline in real output growth of at least 3 pp (percentage point) below the average for the previous four quarters,’” the report said.
“If used in small amounts for productive purposes, risks can be managed, but when used in large doses for unproductive spending, this can have deleterious economic effects,” it warned.
In another note, Nomura said that the latest forward-looking survey by the Reserve Bank of India pointed to a troubling stagflationary outcome.
While households expected inflation to rise to 10.5% in a year, consumer and business confidence remained weak, it said.
However, while stagflation risks may dominate in the short run, they are unlikely to be sustained.
“Recent flattening in the mobility curve suggests that sequential growth is stagnating below normal after the initial business resumption, which should have a salutary effect on underlying inflation,” Nomura said.