RBI increases WMA limit of states, UTs by 30%, relaxes export rules

The central bank also said banks don't need to activate countercyclical capital buffers (CCyB) for one more year, which means the banks can utilize the capital earmarked for the buffer

The Reserve Bank of India (RBI) has decided to increase the Ways and Means Advances (WMA) limit for state governments and Union Territories by 30 per cent till September 30, and allowed exporters six months extra to realise their export proceeds, in a bid to deal with the economic fallout of the coronavirus pandemic.

The central bank also said banks didn’t need to activate countercyclical capital buffers for one more year. This means banks can utilise the capital earmarked for the buffer.

 Relaxing the export norms, the RBI said exporters could now take 15 months to realise and repatriate their export proceeds, for exports made up to July 31. According to the normal rules, exporters have to repatriate the export proceeds within nine months. The RBI took the call to “enable exporters to realise their receipts, especially from Covid-19 affected countries, within the extended period and also provide greater flexibility to them to negotiate future export contracts with buyers abroad”.

According to Ajay Sahai, director general of the Federation of Indian Exports Organisation (FIEO), the relaxation by the RBI is what the industry suggested the central bank, and is a move that will ease the pain of exporters considerably.

 

 

 “The relaxation also works as a marketing tool for exporters. In the absence of demand, customers ask for credit, which exporters can give now with an aim to recover the proceeds a little later. This helps the Indian exporters to expand their presence in the overseas markets,” Sahai said.

 However, currency dealers pointed out that the central bank should have taken some steps to ease the pain of exporters engaged in forward contracts. Since export realisation has been postponed, exporters have no use of forward contracts, but must honour the contract, thus incurring losses.

 WMA is a temporary liquidity arrangement with the central bank, which enables the Centre and states to borrow money up to 90 days from the RBI to tide over their liquidity mismatch. On Tuesday, the RBI also increased WMA for the Centre to Rs 1.2 trillion for the first half, up from Rs 75,000 crore in the first half last year, and Rs 35,000 crore for the second half of 2019-20 originally announced. 

In the case of the Centre, the RBI had said it might issue bonds if the central government utilised 75 per cent of its WMA.

The increase in the WMA limits will help states to rely less on the bond markets, experts say. For their financing needs, states typically borrow from the bond markets, but the spread between equivalent maturity government bonds and those of states have increased to more than 120 basis points, as against 40-60 basis points in normal times. States have also increased their borrowing from the bond market, which is also putting upward pressure on yields. In the first quarter ending June 30, states will be borrowing Rs 1.27 trillion from the bond market. An increase by the RBI in the WMA limit, even as temporary, helps states to avoid unplanned borrowings experts say. Instead, the states can simply tap the RBI resources in the case of liquidity mismatch.