The Government of India and the Reserve Bank of India
signed an agreement on March 26, 1997 at New Delhi to formally
put in place the announcement made by the Union Finance Minister
in his Budget Speech for 1997-98 as under :
'The system of ad hoc Treasury Bills to finance the budget deficit will be discontinued with effect from April 1, 1997. A
scheme of ways and means advances (WMA) by the RBI to the Central
government is being introduced to accommodate temporary mismatch
es in the government's receipts and payments. This will not be a
permanent source of financing the government's deficit.'
Salient Features of the Agreement
The salient features of the agreement signed by Dr. C.
Rangarajan, Governor, on behalf of the Reserve Bank of India and
Shri M.S. Ahluwalia, Finance Secretary, on behalf of the President of India are as follows :-
- The system of ad hoc Treasury Bills to finance budget deficit
will be discontinued with effect from April 1, 1997.
- The outstanding ad hoc Treasury Bills as on March 31, 1997
would be funded into special securities, without any specified
maturity, at an interest rate of 4.6 per cent per annum, on April
1, 1997. The outstanding Tap Treasury Bills as on March 31, 1997
will be paid off on maturity with an equivalent creation of
special securities without any specified maturity, at an interest
rate of 4.6 per cent per annum.
- From April 1, 1997 a scheme of Ways and Means Advances
(WMA) by the Reserve Bank of India (RBI) to the Government of
India (GOI) will be introduced to accommodate temporary mismatch
es in Government receipts and payments. The limit and the rate
of interest on WMA and the rate of interest on Overdraft will be
mutually agreed between RBI and Government from time to time.
- The arrangements for the fiscal year 1997-98 in respect of
WMA limits and rate of interest are :
- The limit for Ways and Means Advances will be Rs.12,000 crore
for the first half of the year (April to September) and Rs.8,000
crore for the second half of the year (October to March).
- The interest rate on Ways and Means Advances and Overdraft
for the Government will be the following:
| (i) Up to the Ways and Means Advances limits. |
: |
'Calculated Rate' minus
3 per cent. The 'Calculated o73
Rate' for any quarter beginning April 1, 1997, will mean
the average of the implicit
yield at the cut-off prices of
91 day Treasury Bill auctions
held during the previous
quarter. |
| (ii)For Overdraft beyond the Ways and Means Advances limits. |
: |
The rate at (b)(i) plus
2 per cent on the Overdraft
amount. |
- Overdraft will not be permissible for periods exceeding ten
consecutive working days after March 31, 1999.
It may be recalled that a Supplemental Agreement was
signed between the Central Government and the Reserve Bank on
September 9, 1994 to phase out the system of ad hoc Treasury
Bills, over a period of three years. It was agreed that the net
issue of ad hoc Treasury Bills at the end of the year 1994-95 was
not to exceed Rs.6,000 crore and that, if the net issue of ad hoc
Treasury Bills exceeded Rs.9,000 crore for more than ten consecutive working days at any time during the year, the Reserve Bank
would automatically reduce the level of ad hoc Treasury Bills, by
auctioning Treasury Bills or selling fresh Government of India
dated securities in the market. Similar ceilings at Rs.5,000
crore for year end and Rs.9,000 crore for intra year were stipulated for 1995-96 and 1996-97. The scheme of phasing out ad hocs
worked reasonably well. While in 1994-95 the agreement was
strictly adhered to both in terms of year end level of ad hoc
Treasury Bills as well as the intra year limit, in 1995-96 there
were prolonged periods in which intra year limit was exceeded.
During 1996-97 since August 14, 1996 the net issue of ad hocs has
remained below within the year limit.
Difference betwen ad hocs and WMA
There are significant differences between the earlier
scheme of monetising budget deficits through ad hocs and WMA:
First, WMA is not a source of financing and as such 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. The new system implies therefore periodic vacation of advances made and not accumulation year after
year.
Secondly, limits on WMA will be fixed and any excess
drawal by Government beyond the limit will not be permissible for
more than ten consecutive working days after March 1999.
Thirdly, WMA will be charged at market related interest
rate.
RBI Support for Market Borrowing
An amount of Rs.16,000 crore has been indicated in the
Budget for 1997-98 as the 'Monetised Fiscal Deficit' which represents the expected level of RBI's support ex ante to Central
Government borrowing. This amount reflects the RBI support to
primary issues of Central Government securities. The actual
support ex post could be different from the amount of Rs.16,000
crore on account of Open Market Operations by the Reserve Bank of
India depending upon emerging monetary situation. Illustratively
in 1993-94, RBI's support to primary issues was Rs.7014 crore but
the monetised deficit was only Rs.260 crore. Similarly, in
1996-97, till March 14, RBI support was Rs.13,044 crore but net
RBI credit was only Rs.3,795 crore.
During the transition period up to March 1999, the over
draft would be permissible beyond ten consecutive working days.
It is expected that under the new system the Government will stay
well within the limit stipulated in the Agreement. The new
system while ensuring fiscal discipline would establish a reasonable mechanism of financing the day to day requirements of the
Government of India. The fresh agreement will provide greater
autonomy to the Reserve Bank in formulating and implementing
monetary policy.
Alpana Killawala
Deputy General Manager
Press Release : 1996-97/576
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