Covid-19 Crisis: Government Gets More Short-Term Funding Support From RBI

The Reserve Bank of India has stepped in with more short-term funding support for the central government to help it tide over the Covid-19 crisis. A 40-day lockdown to curb the spread of the coronavirus has led to a surge in expenses and a sudden stop in revenues.

To tide over this period of cashflow mismatch, the RBI has increased the limit for short-term credit under the ‘Ways and Means Advances’.

• For the April-September 2020 period, the WMA limit for the central government has been raised to Rs 2 lakh crore from an earlier revised Rs 1.2 lakh crore.
• The limit of Rs 2 lakh crore is the highest ever and a sharp jump compared to the Rs 75,000 crore limit in the same period last year.

This has been done to tide over the situation arising from the outbreak of the Covid-19 pandemic, the RBI said in a release on Monday.

Ways and means advances are temporary loan facilities provided to the central and state governments to enable them to meet temporary mismatches between revenue and expenditure. The government makes an interest payment to the central bank when it borrows money. The rate of interest is the same as the repo rate, while the tenure is three months, with a 21-day period of overdraft permitted.

On March 31, RBI had set the WMA limit for the central government at Rs 1.2 lakh crore.

The extension in WMA limits will allow the government to space out its borrowings better, said Madhavi Arora, economist at Edelweiss Securities.

“The government’s borrowings from the treasury bill markets had substantially increased in recent days, though they continue to borrow as per schedule in terms of longer dated government bonds. So, the RBI’s move may lead to some easing off in the issunce of treasury bills,” said Arora.

The central bank has also expanded the limit for states.

On Friday, RBI governor Shaktikanta Das said that the limit for all states would be revised by 60 percent over last year. According to ICRA Ratings, states will now be able to borrow Rs 51,600 crore under the facility.

The increased limits for states, however, are not significant in the current situation, said Devendra Kumar Pant, chief economist at India Ratings & Research in a note on Monday.

“The WMA relief is too little to help, as it means additional liquidity of just Rs 19,335 crore. India Ratings believes the short-term liquidity enhancing measure may provide some reprieve, but is not the solution for the shortfall in states’ revenue,” Pant said.