Wma Interest Rate Fixed 300bp Below 91-Day T-Bill Yield

The Union government and the Reserve Bank of India yesterday signed a historic agreement to end the four-decade-old system of issuing ad hoc treasury bills to finance budget deficits. The system of ad hocs is being replaced by ways and advances (WMA) from the RBI to the Central government from April 1.

The interest rate on the WMA has been pegged 3 percentage points below the average cut-off yield of 91-day treasury bill auctions in the preceding quarter. For fiscal 1997-98, a limit of Rs 12,000 crore has been fixed on ways and means advances for the first half and Rs 8000 crore for next six months.

 

At the current 91-day T-bill rate, the average yield for the last quarter works out to 7 per cent. Thus the government will have to pay a rate of 4 per cent on WMA, which is lower than the 4.6 per cent charged on ad hocs. The Reserve Bank has said that the interest rate on ways and means advances will be determined from time to time.

The penal rate on the WMA overdraft has been fixed at 2 percentage points below the cut-off yield of 91-day T-bill auction in the preceding quarter.

Says P H Ravikumar, senior vice-president, ICICI Bank: The penal rate is slightly low and should have been at least at the 91-day T-bill rate. The rates are also much lower than the 12 per cent charged to the state governments on their WMA and 14 per cent on overdrafts. The agreement was signed on behalf of the government by finance secretary Montek Singh Ahluwalia, and RBI Governor C Rangarajan.

The Reserve Bank has claimed that there are significant differences between ad hocs and WMA. Firstly, WMA is not a source of financing; it will not be shown as a source of financing budget deficit. It is only a mechanism to cover day-to-day mismatches in receipts and payments of the government. Therefore, the advances have to be vacated periodically and will not get accumulated year after year.

The RBI has said that the 1997-98 budget has provided for both receipts and discharges of WMA at Rs 1,00,000 crore in gross terms, implying a net amount of zero. Therefore, WMA is not a source of monetisation, the RBI has said. Secondly, limits on WMA will be fixed and any excess drawal by the government beyond the limit will not be permissible for more than 10 consecutive working days after March 1999.

However, an earlier RBI press note has said that the utilisation of WMA at 75 per cent of limit fixed would trigger a fresh issue of government securities. It is not clear if this stipulation will come into force after March 1999.

The outstanding ad hoc treasury bills as on March 31 will be funded into special securities, without any specified maturity, at an interest rate of 4.6 per cent on April 1.

The outstanding tap treasury bills as on March 31 will be paid off on maturity with an equivalent creation of special securities without any specified maturity at a rate of 4.6 per cent.

RBI governor C Rangarajan said that with improvements in the governments cash management and the RBIs debt management techniques, the actual need for WMA is expected to narrow down during the transition period of two years up to March 1999.

With overdrafts not being permitted beyond a period of 10 consecutive working days after March 1999, the scheme of WMA will culminate in an ideal position of fiscal balance being achieved, he said.

The RBI governor argued that unlike lending support through ad hocs, which remained almost automatic and without any limit, monetisation by the RBI henceforth would be voluntary and in alignment with its goals of achieving monetary stability and exchange risk management.

Thus the level of monetisation by the RBI will depend upon the level of real sector activity, inflationary trends and expectations, foreign exchange inflows and the consequent need to sterilise such inflows in keeping with the RBIs aim of keeping monetary expansion within the targeted levels. The monetised deficit of Rs 16,000 crore shown in the budget should, therefore, be taken purely as initial assumption and the actual level could turn out to be different due to the RBIs operations in the market, he said.

A supplementary agreement was signed between the Central government and the RBI on September 9, 1994, to phase out the system of ad hocs over a period of three years. A ceiling on net issue of ad hocs was set at Rs 6,000 crore (with ad hocs not to exceed over Rs 9000 crore for more than 10 consecutive days during the year), Rs 5000 crore and Rs 9000 crore for end 1994-95, 1995-96 and 1996-97, respectively. The agreement was generally adhered to by the government except in 1995-96, when there were prolonged periods in which intra-year limits were exceeded. Since August 1996, the net issue of ad hocs has, however, remained within limits.