The Government recently announced a 60% increase in the Ways and Means Advance (WMA) limit with the Reserve Bank of India (RBI), raising it from Rs 75,000 crore to Rs 1.20 lakh crore. This decision was made in response to the anticipated cash flow mismatch in Financial Year (FY) 21 due to increased expenditures in combating the COVID-19 pandemic.
Understanding Ways and Means Advances
The Ways and Means Advances scheme was launched in 1997 as a tool to reconcile mismatches between government receipts and payments. Under the scheme, the Government can borrow immediate cash from the RBI if needed. However, this amount must be returned within 90 days, with interest charged at the existing repo rate. If the WMA remains unpaid beyond 90 days, it is treated as an overdraft and incurs an additional interest rate of 2 percentage points above the repo rate.
The mutual agreement between the Government and RBI dictates the limits for Ways and Means Advances, which are subject to periodic revisions. By increasing the limit, the government gains the flexibility to source funds from the RBI without resorting to market borrowing.
Government’s Fiscal Responsibilities and Fundraising Strategies
The increase in the WMA limit comes on the heels of a Rs 1.7 lakh crore relief package announced by the Government under the Pradhan Mantri Garib Kalyan Yojana. This initiative aims to provide income support, free food, and other amenities to aid the less fortunate amid the 21-day national lockdown. The funding required for these social measures will be sourced not only from the market but also from institutions like the RBI.
The Budget 2020-21 outlined the Centre’s net market borrowing, inclusive of government securities, treasury bills, and the post office life insurance fund, at an estimated Rs 5.36 lakh crore. The Centre plans to source 62.56% of the gross borrowings for FY21, amounting to Rs 4.88 lakh crore, in the first half of the fiscal year.
Gearing up to Issue Debt Exchange Traded Fund
In addition to this, the Centre has planned to launch a Debt Exchange Traded Fund comprising government securities in FY21. This strategy aims to broaden the investor base and provide retail investors an opportunity to invest in this risk-free instrument, as they often face difficulties in directly buying government bonds.
About Exchange-Traded Fund (ETF)
An Exchange-Traded Fund (ETF) comprises a basket of securities that are traded on an exchange, similar to a stock. ETFs reflect the constitution of an index such as BSE Sensex and their trading value is based on the Net Asset Value (NAV) of the underlying stocks. Unlike mutual funds which trade only once a day after the market closes, ETF share prices fluctuate throughout the day as they are bought and sold. Depending on its makeup, an ETF can incorporate stocks across various industries or be specific to one industry or sector.
