Ways and means advances, Financial Management

WAYS AND MEANS ADVANCES (WMAs)

WMA is not a permanent source of financing government deficit. But, this is likely to provide greater autonomy to the RBI in conducting monetary policy. According to the agreement, the RBI will no longer monetize the fiscal deficit and the government should borrow from the market to finance the fiscal deficit. But, the RBI will extend the advances to the Central and State governments to tide over temporary or short-term finance requirements which needs to be repaid in three months. Drawals in excess of the WMAs limit will be allowed for a maximum of ten consecutive days. The RBI allows for three types of ways and means advances: the clean WMAs (unsecured), the secured WMAs (which are secured against central government securities) and the special WMAs which are allowed in exceptional circumstances against the pledge of government securities.

The system of WMAs broadly works as follows:

  • The limit of WMAs is decided in terms of mutual consultations between the RBI and the central government.
  • The interest charged up to the WMAs limit would be three percent less than the average implicit yield at the cut-off prices of 91-day T-bills in the previous quarter and for the amount in excess of WMAs limit, it is two percent more than the normal rate.
  • The interest rate is decided on, and can be altered by mutual agreement between the RBI and the government.

The outstanding balance of WMAs at the end of the year should be repaid by the central government (it should be brought down to zero). If the balance remains unpaid for more than two weeks after the end of year, the RBI converts the amount into dated securities at the market rate of interest.

If 75 percent of limit is utilized, the RBI should initiate a fresh flotation of central government securities.

 

Posted Date: 9/11/2012 3:46:31 AM | Location : United States







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