In an indirect warning to Delhi, the Reserve Bank of India (RBI) today said central banks could find it tough to maintain price stability if governments continued to incur large deficits.
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Maintaining that price stability was necessary for financial stability, RBI’s Trend and Progress report, released this evening, said higher inflation could push up the yield curve, which could result in significant mark-to-market losses for fixed income instruments. This, in turn, had adverse implications on bank profitability, as banks had to benchmark their bond portfolio to the prevailing prices. Bond yields had an inverse relationship with prices.
Over the past 12 months, governments across the world have provided large booster doses to the economy to spur growth. This has resulted in higher deficits.
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