Govt: Latest debt instrument not to fund fiscal deficit

A day after announcing the latest debt instrument to tide over temporary cash flow problem, the government and the Reserve Bank of India (RBI) have tried to clear the air on the cash management bills and said that the tool would not be used to fund the Centre’s fiscal deficit.

Finance Secretary Ashok Chawla in the morning today said that the new short-term instrument would add more flexibility to the cash management process.

Asked if the new instrument would supplement the government’s existing borrowing plan, Chawla said, “Cash management bills are part of the overall programme.”

By evening, the central bank joined in saying that the new bills were not aimed at funding the government’s fiscal deficit and would not increase the size of the borrowings. “Cash management bills only provide an additional instrument to the government for its cash management operations in a cost-effective manner,” Deputy Governor Shyamala Gopinath told reporters.

The government borrowing has been budgeted at Rs 4,51,000 crore for the current financial year.

“We are not taking a view either on (interest) rates or on liquidity. We have not issued the notification with that intention,” she said.

The deputy governor said the cash bills would be in addition to the short-term loans that the RBI gave to the government in the form of ways and means advances (WMAs) for managing its fund mismatches. “This is an addition to the ways and means advances and treasury bills. So to that extent, it (government) can take a view whether to go for a cash management bill or WMA,” she said.

Government officials, however, said the Centre would prefer cash management bills to tide over temporary cash mismatches instead of borrowing under WMA, whenever yields were low. “Typically, WMA has been a costlier option for the government in the past. So with the introduction of this new instrument, we will prefer to borrow under this tool rather than borrowing under WMA,” the source said.

“In the current environment, for instance, when the yields are low and if we were to face a temporary cash mismatch, we will borrow under the cash management bills,” he said.

The source, however, said the government was unlikely to see any cash management mismatches in the near term.

Yesterday, the government had said that it would issue cash management bills aimed at bridging its temporary cash flow mismatches. The cash management bills will have the generic character of treasury bills, but will be non-standard, meaning the tenure will vary as per the need of the government.

These bills would be of less than 91-day tenure and issued at a discount to the face value through auctions, as in the case of treasury bills, said the government.