Printing of the currency has its association with the increase in inflation.  Because if everyone has more money, prices go up instead. Increasing demand  will increase the rate of inflation over time .  

This happened recently in Zimbabwe, in Africa, and in Venezuela, in South America, when these countries printed more money to try to make their economies grow.

Monetizing the deficit is when the RBI directly purchases government bonds (G-Secs) from the primary market to help the Centre’s expenditure.

In turn, the RBI prints more money to finance this debt. In other words, monetization of deficit happens when RBI buys government securities directly from the primary market to fund government’s expenses.

When the printing of currency for a longer period of time, resulted into the “hyperinflation”. 

When Zimbabwe was hit by hyperinflation, in 2008, prices rose as much as 231,000,000% in a single year. 

To get sustained , a country has to make and sell more things – whether goods or services. This makes it safe to print more money, so that people can buy those extra things. 

When a country prints more money without making more things, then prices just go up.

No one is making any more of these models. So even if everyone gets more money to spend, it won’t mean that more people can afford to buy them. The sellers will just put the price up. 

At the moment, USA can  sustain the  printing of its currency . Because the demand of dollar is usually very high because of its importance in international trade.

Most of the valuable things that countries around the world trades, including gold and oil, are priced in US dollars. 

If the US wants to buy more things, it really can just print more dollars. Though if it printed too many, the price of those things in dollars would still go up. 

When poorer countries can only print their own currency, not US dollars. And if they print a lot more, their prices will go up too fast, and people will stop using that money. 

When people will swap goods for other goods, or ask to be paid in US dollars instead. That’s what happened in Zimbabwe and Venezuela, and many other countries that were hit by hyperinflation. 

Venezuela tried to protect its people from hyperinflation by passing laws to keep a low price on things people need most, like food and medicines. But that just meant that the shops and pharmacies ran out of those things.

But it’s not true that a country can never get sustained by printing money. This can happen, if it doesn’t have enough money to start with. If there’s a shortage of money, businesses can’t sell enough, or pay all their workers. People can’t even borrow money from banks, because they don’t have enough either. In  this case, printing more money lets people spend more, which lets companies produce more, so there are more things to buy as well as more money to buy them with.

In 2008, there was the Global financial crisis, when banks lost a lot of money, and couldn’t let their customers have it. Luckily, most countries have central banks, which help to run the other banks, and they printed extra money to get their economies moving again. 

Too little money makes prices fall, which is bad. But printing more money, when there isn’t more production, makes prices rise. 

The central banks, with regard to printing of notes, take decisions based on so many complex factors relating to financial stability, inflation and stability of exchange rates . 

When government is going for direct monetisation of its deficit ,it will  asks RBI   to print new currency in return for new bonds that the government gives to the RBI. 

In lieu of printing this cash, which is a liability for the RBI. it gets government bonds, which are an asset for the RBI since such bonds carry the government’s promise to pay back the designated sum at a specified date. 

In the UK in the month of April 2020, the Bank of England extended direct monetization facility to the UK government even though Andrew Bailey, Governor of the Bank of England, opposed the move till the last moment. 

Until 1997, the RBI “automatically” monetized the government’s deficit. However, direct monetization of government deficit has its downsides. In 1994, Manmohan Singh (former RBI Governor and then Finance Minister) and C Rangarajan, then RBI Governor, decided to end this facility by 1997. 

Still an escape clause in the 2017 amendment of the FRBM (Fiscal Responsibility and Budget Management Act) act permits such direct monetisation under special circumstances.

According to C. Rangarajan ,“Monetisation of the deficit is inevitable. Such a large increase in expenditure cannot be managed without monetisation of government debt,”. 

This is different from the “indirect” monetising that RBI does when it conducts the so-called Open Market Operations (OMOs) and/ or purchases bonds in the secondary market.

Direct monetisation provides an opportunity for the government to boost overall demand at the time when private demand has fallen, but it may fuel inflation. 

While no ideal level of debt is set in stone ,most economists believe developing economies like India should not have debt higher than 80%-90% of the GDP. At present, it is around 70% of GDP in India.

Nobel laureate Abhijit Banerjee  suggested that printing money is an ideal way to support expenditure during the ongoing second wave of the pandemic. While Banerjee said that the additional cash printing will help in direct cash transfers to poorer sections of the society. 

When the government is required to increase its expenditure beyond budgetary allocation in view of a crisis situation, the central bank has the option of printing more money to support the additional liquidity requirement. 

Additional money printing is a strategy that many developed nations adapt to fight a recession. The US has done it during the Coronavirus pandemic to make credit easily available at lower interest rates. But it has also expressed the need to gradually taper the additional stimulus in view of upside risk to inflation. 

Former RBI governor D Subbarao recently said that India’s central bank can directly print money and finance additional spending by the government. However, Subbarao added that it should only be done if there is absolutely no alternative. 

According to Subbarao when the RBI buys bonds under its open market operations (OMOs) or buys dollars under its forex operations, it is printing money to pay for those purchases, and that money indirectly goes to finance the government’s borrowing. 

“The important difference though is this when RBI is printing money as part of its liquidity operations, it is in the driver’s seat, deciding how much money to print and how to channel it into the system.