- Definition: Monetization of deficit is when the government finances its deficit directly from RBI.
- RBI prints currency and gives it to the government in return for bonds.
- It creates a debt on the Government of India.
- Implementation:
- Before 1997, GoI used to issue ad hoc Treasury Bills to RBI.
- This practice was stopped in 1997.
- FRBM Act 2003 also prohibits direct monetization.
- It is allowed only in exceptional circumstances.