In this episode of How India’s Economy Works, host Puja Mehra speaks with economist Dr. Parag Waknis to unpack one of the most important yet least understood documents in Indian policymaking, the RBI’s accounts. They explore how the RBI manages government debt, why it holds government securities on its balance sheet, and how these operations influence GDP, liquidity, interest rates and inflation.

The conversation examines the evolution from direct deficit financing to the current system of primary dealers, the significance of foreign exchange reserves, and the RBI’s use of tools such as open market operations and Operation Twist. Dr. Waknis also explains the relationship between government borrowing and central bank profits, and discusses whether these dynamics affect the RBI’s policy independence.

Tune in for insights into the institution at the heart of India’s monetary and financial system.

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TRANSCRIPT

NOTE: This transcript is done by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on feedback@thecore.in.

Puja Mehra: Dr. Parag Waknis, welcome to the show. Thank you for coming.

Parag Waknis: Thank you, Puja. I'm glad to be here. Thank you for inviting me.

Puja Mehra: I want you to help us understand the RBI's balance sheet and why we should be looking at it. You know, what does it tell us about the economy, about our everyday lives? This is something which is really technical and a lot of people have a lot of views about it.

So, it'll be really nice to get from you an idea of why all this is so important.

Parag Waknis: Right. So, RBI is the government's banker. RBI manages government's borrowing programme.

Initially, like before 90s, it was kind of a direct deficit financing that happened at that time. So, whatever the government need is, RBI supported it by buying its securities through direct monetization or printing money, as we said. But there was a reform that was introduced, which was called as Ways and Means Advances.

The idea was to stop this direct deficit financing or automatic deficit financing, as you might call the regime before that. So, now what happens is that the RBI doesn't directly buy government securities when they're issued first, but there are different intermediaries, which we call as primary dealers, who are supposed to buy these securities along with other private investors who is interested. Now, it could happen that government may have issued bonds, let's say for 30,000 crores, but only 24,000 crores got bought between the primary dealers and all the private investors that were ready to buy it.

So, there is 6,000 shortfall, who buys it. So, now under the new regime, it is the primary dealers, which are basically large security buying departments of banks like SBI, HDFC, ICICI, Axis Bank and so on, they buy it. This is a commitment that they have given to the RBI.

Now, in exchange, RBI gives them access to RBI's liquidity facility, which is that they can freely borrow from RBI. Of course, at an interest rate, it's not free of cost, but they have access to that liquidity in exchange for this bidding commitment that they get. Eventually, what happens is, to implement the monetary policy or to maintain the liquidity in the system, RBI eventually ends up buying and selling these bonds anyways.

But that is done in the secondary market after the securities are bought. So, the automatic route of deficit financing is not there anymore. So, there is a layer in between and there is also a time gap in between that is there, that acts as a buffer that you have.

But eventually, when RBI does the open market operations, all these securities end up on RBI's balance sheet. So, that's one of the reasons why the balance sheet is important. For developed countries, for US, the balance sheet becomes important because of unconventional monetary policies, buying and selling of bonds to influence the interest rate, per se.

In India, the primary reason is because many a times, the issues of government bonds go unsubscribed and primary dealers are forced to buy them. Eventually, RBI would pick that slack up through open market operations and bring those securities back on its balance sheet. So, that's also one of the reasons why we see the proportion of domestic debt in RBI's balance sheet has gone up over the years.

Because of this liquidity management and the fact that the government bond issues kind of go unsubscribed many times. Not completely, but at least partly.

Puja Mehra: Why is that? I did read a report just last week where the RBI before the Monetary Policy Committee meeting sort of scrapped one of the issues because I think it wasn't happy with the bids.

Parag Waknis: So, one thing is there is always a mismatch between what government is ready to pay in terms of interest and what the private investors demand as interest. So, private investors are also kind of discounting what's going to happen in future. So, if they see that the borrowing programme doesn't give them full picture, they would expect that eventually the government will borrow more and therefore, they perceive the interest rate risk as high and therefore, they want the interest rate to increase to compensate for that.

But of course, higher interest rate would mean higher interest rate expenses for the government and the government doesn't like it. So, this mismatch is definitely there that leads to undersubscription. Now here, I would like to contrast it with the US, for example.

The US federal reserve, the US government debt is never undersubscribed because the whole world basically buys US government debt. So, that's one of the big advantages that the United States government has that it never eventually has to resort to any kind of direct or indirect monetization of its deficit. Because one, dollar being an international reserve currency, there are huge dollar reserves all across the world.

And countries, the central banks, even RBI for that matter, is looking to invest these reserves into some interest-bearing assets. So, US government debt is a very sought-after asset in that perspective. And so, even in RBI balance sheet, you will find US government debt as one of the assets that comes up.

And there are many other things. They would also diversify in terms of foreign exchange currencies. They might buy government debt from, let's say, European Union because that's also...

So, there are, in economics, we call these as safe asset creators. So, most of the developed countries' central banks and governments are safe asset creators. Basically, assets which everybody would want them in their portfolio because the risk of default is possibly very low.

Puja Mehra: So, when we read that the RBI holds large forex reserves, they're not just held as dollars, they're held as these securities, is it?

Parag Waknis: Right. They are held in variety of things. They could also be precious metals, for that matter.

So, different assets. So, it's the same principle of portfolio diversification that any private institutional investor would follow, RBI would follow, to kind of reduce the risk and maximise the return that it has. What happened after 2008 financial crisis was that the central banks, especially the United States Central Bank, which is the Federal Reserve, conducted a lot of unconventional monetary policies, which unconventional in the sense that up until then, none of the central banks had ever done that.

Which was, one, they bought a lot of private sector assets. And two, they engaged into what we now know as quantitative easing, which was basically swapping long-term securities for short-term securities, or other way around, of the government. So, these two were completely non-traditional policies that were adopted.

And so, people started focussing on what these balance sheets are comprised of, because a lot of the assets which the Federal Reserve took at that time were also deemed as toxic assets. So, they were basically assets which could not be priced, because the underlying housing loans that these assets were based on, people had basically defaulted on them. And because these securities were built on securities and securities through the process of what we call securitisation, that means raising money to buy loans from somebody, it kind of became hard to price them, because there were like 100 intermediaries in between which had raised securities to buy securities.

So, it became difficult. So, people wanted to know what's happening with the Federal Reserve's balance sheet. And also, when the Federal Reserve is doing, let's say, quantitative easing, which is swapping long-term securities for short-term securities, so the total debt is not necessarily changing, but the composition is changing.

Puja Mehra: That's the RBI. So, it was something like that?

Parag Waknis: RBI did that, yes.

Puja Mehra: When was this?

Parag Waknis: About four to five years back. It was called as Operation Twist. It was right after the pandemic.

Puja Mehra: And why was it that? How does it help?

Parag Waknis: Well, of course, the government did not say it, but the political-economy reasons for that thing was that the government was trying to influence the cost of its borrowing programme. So, it was trying to lower the interest rate by building up demand for short-term securities. So, typically, what happens is bond prices and the rate of return on bonds are negatively related.

So, if you boost up demand for a particular security, let's say, six months bond, then the price will go up, which also means that the rate of return will go down. So, that was the plan. So, the government was trying to influence its short-term borrowing cost because, obviously, it was pandemic.

There was increase in expenditure, which was not expected before just one or two years before.

Puja Mehra: But government would always want to lower its borrowing costs. So, why only do it in specific points in time?

Parag Waknis: Well, it also depends upon how big the borrowing programme is. So, especially after crises like pandemic or financial crisis, typically, the government borrowing programmes are quite huge because governments want to support a lot of different kinds of social expenditure, crisis support, redistributive policies, and so on. So, governments expect to spend more.

And especially after pandemic, the economy was anyway not doing well. So, taxation wasn't an option anymore.

Puja Mehra: Which is something that's probably going to happen this year also, no? Even before the Iran conflict started and the government subsidy bill began to rise, in this house budget, an unusually high increase in government's borrowings was budgeted. So, are we seeing something like that again this year?

Do you expect it?

Parag Waknis: Expected, yes. So, I wouldn't say that whatever we are seeing right now is the full impact because we don't yet know how the Iran-Israel and US war is going to pan out and how long it's going to drag. There seem to be points when we think that, okay, looks like it has died down.

Countries are talking now. And then the next day, it doesn't seem to be that way. And anyways, many of these impacts, even if the war ends today, many of these impacts will take about six months to one year to unfold, to kind of back up our supplies of LPG, back up our supplies of gas, and so on.

So, the impact on the market prices would take at least about one year to figure out what's happening, even if the war ends today.

Puja Mehra: Right. So, when the government borrows, why doesn't just the RBI take on all of that debt? Why doesn't the RBI only lend to the government?

Why does the RBI need to have these primary dealers and try and make a full market for trading government debt?

Parag Waknis: So, one of the reasons for that is, again, this automatic monetization or deficit financing that you have. So, the old days of printing money have actually gone. So, now what RBI does is basically just credits digits in government's account, right?

That is the idea of printing money now. So, there is no actual printing money in that sense. But when the government uses those digits to buy things in the economy, that's when the real impact of that happens.

So, money gets released in the economy, people spend on goods and services. Now, typically, what happens is that if the rate of growth in money is higher than the rate of growth of output, that could build up inflationary pressures. And mild inflationary pressures can be managed.

For example, RBI itself has an inflation targeting framework now from about 2015 onwards. So, by managing liquidity and changing its target interest rate, which is the call money market rate, which is the operating target now, RBI can manage some inflationary pressures in the economy. But if the deficit financing persists, then those inflationary pressures build up.

And then there are other headwinds too, which RBI has to kind of keep track of. So, for example, external shocks. So, we did not expect about six months back this whole war will happen.

So, the more inflationary pressures that you would have from deficit financing, the less room is there for RBI to manage other shocks that would eventually lead to inflation in the economy. So, it kind of reduces RBI's policy effectiveness in that sense, or degrees of freedom, if you want to think about it that way. So, that's why printing money or deficit financing is not always a good idea, even though emergency measures or situations might demand it at times.

Just one more thing, which I kind of forgot to mention about RBI's balance sheet, is that most of the bank notes that we use. So, the currency notes that we have, the basic currency notes, which is on coins, which is from one rupee to five rupees, is issued by the government, which is true in the US also. Treasury does that in the US.

But the remaining notes, which are basically 10 rupee notes and above, are basically bank notes. That's what we call them. They're issued by the RBI.

And those are on the liability side of RBI's balance sheet. Having or carrying those on their balance sheet ensures that you and I can actually transact in the economy. Because those bank notes, either physically or in the form of digits, is something that we end up using for paying for different things that we buy.

So, that's also one of the reasons why the balance sheet is important.

Puja Mehra: I'm so glad you raised this. Please help us understand the difference between why is it that the government issues the lower denomination coins and why is it that the RBI issues the higher note?

Parag Waknis: So, the basic currency is one rupee, right? That's our currency that we have. For example, in the United States, the basic currency is one US dollar.

And whatever coinage that you get, I don't think we have coinage less than one rupee anymore. We used to have, not anymore. But in the US, you still have quarters.

I think they phased out pennies now. So, this is the basic currency that the government is supposed to issue because that is the currency of the government. That is the unit of count of the government.

And that is the currency that symbolises, basically, the sovereign's ability to create money. The trust is on the rupee that is issued by the government. RBI is a banker.

RBI doesn't have the ability to create this basic currency. What RBI does is that it issues a 10 rupee note or a 50 rupee note or a 100 rupee note, for that matter, which are what, in economics, we call as promissory notes. So, if you see on that, it's written that the bearer, whoever comes to RBI, will get the sum of 100 rupees.

So, they are exchangeable for the units of the basic currency. Of course, you and I, we do not go to RBI every time we want that. We just trust that and we keep on exchanging the banknotes.

So, banknotes or promissory notes are the major form of currency that we use, but it is trusted because it is redeemable in the basic unit of the currency, which is issued by the sovereign. That's the difference. And it's the same everywhere.

With some exceptions, there are some places where private banks also issue banknotes. But again, they are trusted because they're redeemable in the basic currency issued by the sovereign.

Puja Mehra: The RBI's balance sheet for last year has just come out. It was being discussed mainly from the point of view of how much surplus they have decided to transfer to the government as surplus. So, what is the balance sheet of last year showing and telling us?

Parag Waknis: One of the things which I was able to just, with a quick browsing, I was able to see is, first of all, rise in the domestic debt as a proportion of total assets. It's still not a lot, but it has substantially increased over a period of time.

Puja Mehra: You mean government debts that RBI holds. The RBI is lending to the government.

Parag Waknis: The RBI is lending to the government. So again, remember, this is not direct lending. So, RBI would end up, because of the whole fiscal responsibility, bill management and all that, RBI doesn't directly subscribe to the primary issue of government debt.

But eventually, through open market operations and liquidity management that it has to do for inflation targeting, it will end up taking debt from the primary debtors. So, that's what is happening. That's what is creating this rise in the domestic debt and RBI's balance sheet right now.

Now, transfer of profits by itself is not a big deal. I mean, most of the central banks all across the world have that written in their law, that the profits will be transferred to the government. Because after all, government owns the central bank.

So, central bank functionally needs to be independent, but the legal structure is that the central bank is owned by the government in that sense. It is the majority promoter, if you like that language from private parlance. I think one of the problems with the transfers that would happen in a developing country like India, where there is not much demand for government debt from private investors.

Basically, what happens is, RBI ends up with this government debt on its balance sheet. Now, when the government of India pays interest on this debt, RBI will collect it, because RBI is the owner right now for all the debt that is there. So, the profits actually comprise, partly comprise of this interest earned from the government debt.

Then it is going to pay it back. So, it's kind of, you know, giving government a free pass, at least partly, not completely, on its interest expenses.

Puja Mehra: Did I understand this right? The incentive for the finance ministry is to borrow more and more on behalf of government, because then that ends up inevitably on the RBI's balance sheet, from which the RBI earns interest income. And then they pay back that interest income to the finance ministry as surplus.

So, borrow more and you make dividends in return for that.

Parag Waknis: Something like that, yes. But I think the government is also aware of, you know, the impact that if it keeps on going by this route, it would eventually have on the economy.

Puja Mehra: What will that be? What will that be?

Parag Waknis: So, eventually what it basically would mean that, two things, one is that indirectly the RBI is still financing government spending, which eventually means not direct monetization, but still indirect monetization in that sense. So, the inflationary pressures would be there because of it, if the economy's output is not responding for some other reason. Right?

So, that's one thing. The second thing is that private investors actually see this, right? So, private investors watch these events, and then eventually what they come to understand is that the actual government borrowing programme is kind of understates the needs of what the government actually would require to support its borrowing programme.

And they're going to incorporate that information when they're going to next bid for the government debt. And so, they are going to require a higher rate of interest because they see this accounting gimmick that is going on, which is kind of masking the real level of government programme that is there. And then it kind of becomes a vicious circle then, when the government is not ready to pay for it, then the RBI ends up buying it, eventually through open market operations and so on, reducing its policy effectiveness to control inflation in the economy.

And eventually it's going to boomerang on the government bank. The interesting thing is that governments last for five years. So, there is also this incentive to push the can down the road.

I don't have to take care of it unless I see the probability of re-election as very high. In that case, then I would not want to go down that route because then the inflation, when it builds up, I am still there in office to deal with it. So, that is not something which I want to do.

Puja Mehra: And you're saying that the balance sheet is showing that this phenomenon, in fact, has been increasing. The RBI is holding more and more. There is a huge increase this time.

Parag Waknis: Right, right. But of course, careful analysis would require to actually see what are the different factors that are leading it to this. What I'm trying to say is that there are different economic mechanisms at play that might be driving this rise in the domestic debt.

Exactly which contributes how much is kind of difficult to quantify. But there are all these factors in play.

Puja Mehra: I think private investors who take on government debt I think are seeing this because I read somewhere recently a piece where they said that, you know, the sovereign is borrowing at almost close to 7%. But any retail borrower for a car loan or a home loan is borrowing at anything between 6 to 6.5%. So, you know, they're getting a better deal. Is that reflecting what you're saying?

Parag Waknis: Kind of, yes. So because the investors want a higher rate of return on the government debt because they basically see the borrowing programme as somewhat unsustainable at the rates at which government wants them to lend money. So in that sense, yes, the private investors have already discounted that information in the rate of interest that they want to lend that to the government.

Now we end up with a bizarre situation where technically what we call as the risk-free rate which is the rate at which government borrows as being higher than many of the prime borrowers in different loan segments. So in itself, that is a little bit distortionary because usually what happens is that the risk-adjusted rates of return that you calculate on different securities are based on this notion that there is some risk-free rate idea which is there. And which typically is there with the government.

That's what we think, government borrowing. Because technically, governments cannot default because they can print money, right? However directly or indirectly that you want.

You and I can default because even if we print money, nobody's going to accept our money, right? But even then, it looks like the benchmarking that different risk-adjusted rates of returns will have to be based on, the calculation will be based on will not be the risk-free rate that the government borrows at but would be the rate at which some average prime borrower in the country borrows at. So that kind of unhinges the asset prices a little bit.

But I think that's a phenomenon which has to be studied more in depth. What happens when the risk rate is not the one at which the government borrows but at which some private average prime borrower borrows.

Puja Mehra: Probably the market also operates in a better way for the private borrower, relative to government. If the RBI as the government's debt manager is such a powerful operator in the market for government debt, then it's not a very efficient or a smoothly functioning market, right? Relative to market for private borrowing.

Parag Waknis: Yes, in that sense, you're absolutely right. In terms of depth, I mean, what we want in a government securities market right now is that there are many different kinds of players who want to come there, invest, buy and sell and so on. So the depth of the market in two senses.

One is the size of the borrowing market and the government market. And the second is the number of players in the market. We want that to be higher.

We want that more to be populated by private investors than government designated primary dealers. Because after all, they're still designated and they're kind of obligated to buy with that. So in that sense, yes, RBI dominating the bond market or the primary dealers dominating the bond market is definitely not a good idea for expanding the market and making it more active.

I think it's also important to have that so that the other asset prices can adjust accordingly, reflecting the true risk adjusted spread that you have.

Puja Mehra: Let me now introduce the more controversial bit where we've heard people link the RBI's balance sheet to the RBI's independence as a central bank. So people hold views across a wide spectrum on this topic. Some people say the RBI is a very independent central bank.

Some people say it is not such an independent central bank. So how does that link with the balance sheet?

Parag Waknis: Well, you have independence. So independence can be thought of in different ways, right? So operationally, I think when we incorporated the inflation targeting framework, which is a rule-based policy framework, so there is much less ambiguity, much less manoeuvrability in terms of what the RBI is doing.

A lot of clarity. We know that this is the band in which the RBI is going to move. If the inflation rate moves over and above this band, we know what RBI will eventually end up doing.

So it's a very clear framework in that sense. And having that framework itself contributes to the independence a lot because it takes away policymaking from the budgetary constraints that the sovereign faces. But of course, even functioning can actually be influenced outside of this policy circle also.

So you have the kind of experts that you would appoint or how many decisions does the RBI governor take outside of the Monetary Policy Committee. So those are the variety of ways in which independence can be compromised. I'm glad to say that up until now, we haven't seen any serious breach of that kind of independence.

Though there were a couple of times when RBI governor did take a decision to modify the corridor. We have a corridor of monetary policy. We have the call money rate and we have a band around it.

So which is called as the Monetary Policy Corridor. And typically what happens is that the Monetary Policy Committee decides on the...

Puja Mehra: Sorry, what is this band if you could explain to the listeners?

Parag Waknis: So the target monetary policy rate right now is the call money market rate. So that is the shortest term interest rate that RBI can influence without participating in it. RBI does not participate in call money market because it's purely an interbank market that you have.

But RBI can influence liquidity in that system. By buying and selling of government bonds. So increasing or decreasing liquidity and then bringing the call money rate in line with what target it has.

Now apart from this, there is one rate which is above this target rate which is the rate at which banks can borrow from RBI if they fall short of funds. So that's the upper band that you have. And the lower band, the lower bound that you have, upper bound and lower bound that you have is the rate of return that RBI gives if banks keep their money with the RBI.

All banks have reserve accounts with RBI because of clearing of checks and everything. Banks have to have reserve accounts with RBI. This lower bound basically tells you the attractiveness of keeping money in the RBI.

So if RBI is paying let's say an interest rate which is over and above the call money rate just for an example let's say. Then none of the banks would basically end up lending in call money market. They would just keep it with.

That's what happens in US now. So it initially was a corridor with this penal rate and kind of a rate that you would get if you put your money in federal reserve. But after the 2008 financial crisis, their call money market rate which is basically the federal funds rate that kept on coming down to almost zero.

Then the federal reserve started paying interest on reserves which became the positive amount. So one of the reasons why despite huge amount of liquidity being unleashed in the US after the financial crisis, we did not see any inflationary impact of that is because all of that liquidity went back to the federal reserve because federal reserve was the only one which was giving any positive rate of return on that at that time. So basically federal reserve is following the policy what we call as the floor system.

So it's rate of interest on reserves is the policy rate because their federal funds rate is lower than the rate of reserves. Our federal funds rate, which is the call money rate is above that rate on reserves, interest rate on reserves. So this kind of creates the liquidity.

So you want to create this interbank market. So you want liquidity to be accessible if banks fall short of money. But you also want banks to manage money more prudently.

So you don't want them coming to you again and again to borrow. So it's kind of at a higher rate than that. But if banks are keeping money with you, then you don't want to not give anything on it.

So you also give some positive rate of return on that. So this kind of becomes a band around the call money rate. So one other thing that is kind of underappreciated, I think, in this whole inflation targeting debate is that the policy rate is not the only policy tool.

The bank itself is a policy tool. And RBI did use it. After pandemic, it reduced the lower band where the rate it paid on money that was kept with RBI, it reduced it.

And that kind of unleashed a lot of liquidity on the market. Short term liquidity, of course. And that had impact on different kinds of interest.

So for example, the rate of return on commercial paper fell because of it. Because now RBI wasn't paying much interest. So investors would move to other assets to see where the rate of return is coming.

So driving the rates of return down everywhere. That happened. But that hasn't happened frequently.

It was basically after a crisis that happened.

Puja Mehra: In fact, somebody, an official in the finance ministry was a long time back telling me that at the time when they were formulating the inflation targeting policy in the ministry, on the basis of the recommendations they received from the RBI, and they were looking at various alternative policy rates that they could look at. Like, what is the NPC? What should the NPC target?

One of the seven options they had looked at is this corridor that you're saying. Instead of the policy rate itself, they could influence the corridor.

Parag Waknis: The corridor. Yeah. No, it does.

The corridor moving up and down, either symmetrically or asymmetrically, changes the cost of maintaining adequate liquidity for banks. And therefore, it would either tighten. So if the corridor moves up, keeping the policy rates same, it amounts to contraction.

So that would reduce the liquidity. And if the band moves down, keeping the policy rate constant, it would basically increase the liquidity in the system. So that way also policy can be influenced.

Puja Mehra: But to return to the discussion on independence.

Parag Waknis: Yeah. So I see that the rule-based framework in itself, which I know that there are many people voicing concerns against it. How can this be?

There cannot be that blind following and so on. Economic theory is clear. Rules are much better than discretion.

There was a paper which was written in 1980s by Barrow about this, and also Kidland and Prescott about this. Rules are best because they create clarity. Everybody knows what to expect.

And optimisation for agents and financial institutions becomes easier that way. So in that sense, that was the correct step. It also ensures independence.

Because every time the RBI can just say, we are bound by this MPC. We cannot say that. And there is also a framework, even if you want to change the acceptable variation in inflation rate, you still have to wait for five years for the next cycle.

So there are good, what you can say, caveats put in, which kind of ensures the independence of the, at least the monetary policy, in that sense. Now, there are many other things in which you can do that. You can influence decisions.

Because RBI, I mean, does a lot of things than just monetary policy. It manages foreign exchange reserves. It manages liquidity for the government and so on.

And so even though now it has this monetary policy committee to manage the inflation and so on, the government borrowing programme still constrains RBI's balance sheet in the sense that because there is not enough active market or there are not enough active players to buy government debt, RBI would eventually end up getting those on their balance sheet, which kind of reduces the policy effectiveness, overall policy effectiveness.

Puja Mehra: And in fact, RBI doesn't even need to be independent because there is a conflict in its own incentives. As the government's debt manager, its job is to ensure that government manages to raise debt at lower and lower cost. But that conflicts with its role as part of the MTC, where they are supposed to control inflation.

Parag Waknis: Correct. Yeah. So I think that's where the FRBM's buffer kind of makes, gives you some leeway.

So because RBI doesn't directly subscribe to the government debt in primary market, there is still a constraint. I mean, the government cannot just take it for granted. Just to give you an example of this, so Operation Twist, which was our version of quantitative easing, we were not successful.

The RBI, on the behalf of the government, even did it, did it all the active trading and everything. We were not able to invert the yield curve because clearly the investors saw that there is nothing that stays in the government's direction of spending, that it is going to require less borrowing in future than today. And so if I see that track, then I'm not going to fall for this just because you started buying some security and selling some security.

Eventually, I'll resist the price that you're trying to sell me that security at or buy that security at. So we were not successful in inverting the yield curve. The US was at that time.

And that's because the US debt is bought by many other players than the US Federal Reserve. So US Federal Reserve actually does not buy US government debt other than what is needed for its open market operations, which is basically managing liquidity in the system.

Puja Mehra: Also, because the US government's ability to service its debt is vastly more than the Indian government's ability to service its debt, right?

Parag Waknis: Exactly. And that's also tied. So historically, you could call it tied to a hegemony, but hegemony also needs a basis.

It cannot just stand on its own. So one of the thing is that internationally, dollar and dollar denominated assets have deep financial markets. So markets go beyond US boundaries for US dollar denominated debt and other assets.

So that's one of the reasons why dollar is an international reserve currency. That's what you have. And secondly, also strong fundamentals, right?

Puja Mehra: Ultimately, economic heft and strength.

Parag Waknis: Yes. Yeah. It is still tied to your productivity.

That's the fundamental thing. And unless we deliver on that, and you can see this even in the rates of return that different states within India can borrow, right? You will have states like Maharashtra, Gujarat, Tamil Nadu that can borrow at a much lower rate than other states because it's tied to the economic growth ultimately.

Puja Mehra: Right. Thank you. Thank you so much for this masterclass on what RBI does, RBI's balance sheet, how it manages government debt, how that reflects when it's on a balance sheet, how that affects its monetary policy operations.

Thank you so much.

Parag Waknis: Oh, yeah. No, you're welcome.