rupee coins net of the increase in the central government ’ s cash balances. in other words, the reserve bank ’ s holdings of 91 - day treasury bills that forms a part of budget deficit is also a subset of the monetised deficit. however, it may be noted that while the constituents of the budget deficit are measured at face value, those of the net reserve bank credit to the central government are measured at book value. this valuation difference is, however, negligible particularly for 91 - day treasury bills. the correlation between the budget deficit and the monetised deficit grows weaker at times of easy liquidity such as during the current financial year as absorption by the market of government securities including 91 - day treasury bills has gone up substantially. the purchase of government securities by non - rbi entities reduces the monetised deficit in two ways : ( i ) directly by reducing the devolvement on the reserve bank of 91 - day treasury bills and dated securities auctions as well as through the sale of dated securities including repos and ii ) indirectly, as the market off - take of tap treasury bills and fresh government securities improves the central government ’ s cash balances and reduces the central government ’ s recourse to ad hoc treasury bills. 16. the rbi ’ s support to primary issues of central government securities reflects only its support in the primary offers, and net rbi credit to the government could be very different due to other factors. let me illustrate this with some figures. in 1993 - 94, the rbi ’ s support to government was rs. 7, 014 crore, but net rbi credit was only rs. 260 crores. in 1996 - 97, till february 14th, rbi ’ s support was rs. 12, 099 crore, but, net rbi credit was only rs. 7, 837 crore. the monetised deficit is one source of the money supply and is not the only factor affecting the money supply. 17. it is sometimes argued that the real instrument for fiscal prudence should be a statutory ceiling on debt. true, our constitution enables parliamentary legislation relating to a ceiling on debt. the ministry of finance is due to bring out a discussion paper on this. let me not pre - empt its content. but, clearly the new system has merits of its own and will co - exist more effectively with a ceiling on debt. it has merits in itself since it seeks to limit the extent of the rbi ’ s support. technically,

plan though its volume was to be limited to the extent that it was non - inflationary. 4. the ad hoc treasury bills thus emerged as a mode of financing the central government ’ s deficit in the mid - 1950s. for the smooth conduct of government business, it was mutually agreed between the central government and the rbi that a minimum cash balance of rs. 50 crore on fridays and rs. 4 crore on other days would be held by the central government. to adhere to this administrative arrangement, it was agreed that the reserve bank would replenish the government ’ s cash balances by the creation of ad hoc treasury bills in favour of the reserve bank. the ad hoc treasury bills, which were meant to be temporary, gained a permanent as well as a cumulative character. indeed, it became an attractive source of financing government expenditures since it was available at an interest rate pegged at 4. 6 per cent per annum since 1974, i. e. actually at a negative real interest rate. the assault on ad hoc treasury bills 5. the committee to review the working of the monetary system recommended that the reserve bank adopt a system of monetary targeting with feedback. the target is to be fixed taking into account the growth of the real sector and an acceptable order of increase in prices. the adherence to the target implied a limit to the monetisation of the government ’ s deficit. after all, any investment in central government securities by the rbi results in the monetisation of government ’ s deficit, as the rbi ’ s credit to the government is a source of reserve money generation. 6. dr. rangarajan, our governor, brought out the ill - effects of the automatic monetisation of the government deficit through ad hoc treasury bills in his presidential address at the annual conference of the indian economic association in december, 1988. he has been pursuing this subject with missionary zeal since then. analysing fiscal and monetary interactions, he brought out the following issues. first, the scale of government borrowing was maintained at a high level and surpluses on revenue account have given way to deficits. second, such borrowing has been at less than market rates. third, even the growing captive investors in government securities such as commercial banks were not willing to subscribe beyond their statutory obligations. fourth, the rbi as the manager of public debt became the residual subscriber. fifth, since the government incurred deficits year after year, the question of the retirement of treasury bills did not arise. sixth