Wma Interest To Be Pegged To Bank Rate In 1999

The Reserve Bank of India (RBI) has hinted at the possibility of pegging the interest rates for ways and means advances (WMA) to the Centre at the `bank rate' after the two-year transition period ending March 31, 1999.

If WMA to the Centre does attract the bank rate, which now rules at 11 per cent, the government's interest liability under this head will go up substantially.

The interest rate for WMA to the Centre is at present determined by an agreement the finance ministry signed with the RBI on March 26. According to this agreement, the interest rate for WMA advances to the Centre during 1997-98 would come to around 4.6 per cent.

 

This is because the agreement, valid for 1997-98, stipulates that the interest to be paid on WMA would be the calculated rate minus three per cent. The calculated rate for any quarter beginning April 1 will mean the average of the implicit yield at the cut-off prices of 91-day treasury bill auctions held in the previous quarter.

The hint of a sharp rise in the interest rate for WMA advances to the Centre was implicit in the monetary and credit policy for the first half of 1997-98, released by RBI governor C Rangarajan on April 15. The policy clearly stipulates that the rate of interest to be charged on WMA to states would be the bank rate.

According to finance ministry sources, the implication of the move to link the interest rates for WMA to states with the bank rate has gone largely unnoticed by experts in the financial sector. These sources draw attention to two aspects of the agreement. One, the agreement stipulates that the rate of interest on WMA and the limit on WMA would be mutually agreed between RBI and the government from time to time.

The present rate (calculated rate minus three per cent) of around 4.6 per cent is technically valid only till March 1998. Thus, the RBI and the Centre would have to evolve another agreement on the limit and the interest rate on WMA for 1998-99. The issue of the interest rate would be thrown open then in the light of the bank rate prescribed for WMA to states in the monetary and credit policy for the first half of 1997-98.

The question that would automatically arise is why should the RBI make an exception to the Centre. If the states get their WMA from the RBI at the bank rate, why should the Centre also not draw such WMA at the same bank rate. The main objection would be to any system that allows the Centre to pay a lower rate of interest on its WMA than that paid by the states. For the RBI and the finance ministry, it would be difficult to argue against sticking to the bank rate for WMA to the Centre. The second aspect of the agreement is that it provided a transition period of two years up to March 1999, by which time the Centre's WMA needs are expected to be considerably narrowed down. Moreover, no overdraft for periods exceeding 10 consecutive working days will be provided after March 31, 1999.

Sources said it was likely that the RBI might insist on pegging the interest rate for WMA to the Centre at the bank rate only after the transition period is over. The RBI governor has also been quoted as saying that there would be no special dispensation for the Centre as far as WMA and overdraft limits are concerned. Once the transition period is over, the system for the Centre and the states would be the same.

The monetary policy's linking the interest rate for WMA to states with the bank rate is a signal to the Centre that it should prepare for such an interest regime, at least after the transition period of two years, a ministry official said.In 1997-98, the limit for WMA to the Centre will be Rs 12,000 crore for the first half of the year and Rs 8,000 crore for the second half.

These will help the Centre accommodate its temporary mismatches in receipts and payments.