Covid-19 impact: RBI increases centre's WMA limit sharply to Rs 2 trillion

The Reserve Bank of India (RBI) on Monday revised up its ways and means advances (WMA) limit for the government to Rs 2 trillion from Rs 1.2 trillion announced on March 31, as the country slowly emerges from a nationwide lockdown and clamour for a stimulus package to rescue the economy becomes louder.

 
WMAs are temporary liquidity line given by the central bank to the government to meet short-term expenditure needs. The advances will have to be repaid to the RBI within 90 days. The interest is charged at the prevailing repo rate, which is now at 4.4 per cent. The centre can also enjoy an overdraft facility for 10 days more, for which it will have to pay additional interest at 2 percentage points.

 
However, if 75 per cent of the WMA is used, the RBI can come with marketable securities of various tenors. It can be placed with the RBI, or sold in the market if the market conditions remain conducive. The latest limit is a huge increase from the first half of last year’s Rs 75,000 crore. For the second half, the WMA limit for centre was fixed at Rs 35,000 crore for fiscal 2019-20.
Last Friday, the RBI had also increased the WMA limit of states by 60 per cent to help them fight Covid-19 crisis.

The high WMA limit may indicate that the government doesn’t want to disturb the market just as yet. “It is a good move by the RBI. An economic package makes sense only after the lockdown is lifted, and economic activities start to take place. Till then, it may be difficult to fix an amount for the package. So, the exact quantum of borrowing can be fixed later. Meanwhile, WMA gives the government some time to carry on with its expenditure,” said Jayesh Mehta, head of treasury at Bank of America.

 

 
The 10-year bond yields dropped on Monday by 14 basis points to 6.20 per cent, as oil prices fell. The yields also reacted to RBI’s measures of increasing liquidity in the system.

The increase in WMA limit “gives the government more flexibility to obtain funding in addition to the monies borrowed as per the borrowing calendar. So, using WMA will help government to come later with their borrowing and benefit from lower rates,” said Harihar Krishnamoorthy, head of treasury at FirstRand Bank.

 
The revision in WMA limit gives the government ready money to fight Covid-19, and also gives the option to borrow from the market once 75 per cent of the ceiling is reached. However, it is only a short-term arrangement, which would also mean the centre will have to come up with extra borrowing at some point.

Meanwhile, the increased WMA limit would enable the government to spend at the current juncture. “Concomitantly, this will push up system liquidity in a significant way,” said Soumyajit Niyogi, associate director at India Ratings and Research.

 
The International Monetary Fund last week suggested the government to relax its fiscal stance even as the country may not have adequate space for a fiscal package. That would also mean the general government’s debt (centre plus state) may rise to 74.3 per cent of the gross domestic product, from 71.9 per cent in 2019.

 
The government plans to borrow Rs 4.88 trillion, or 63 per cent of its total borrowing, from the market in the first half. Bond dealers expect the government to place any extra borrowing in the first half privately with the central bank, without disturbing the market.



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