How the central government meets the temporary cash needs:
The temporary cash-flow mismatches of the Government is managed through:
● Getting temporary loans from the RBI called Ways and Means Advances (WMA) .
Ways and means advances (WMA):
- Special arrangement in which RBI made temporary advances to the centre and state governments to manage any mismatch in their receipts and payment.
- WMA is a non-tradable loan paper and it cant be used to fund fiscal deficit.
- WMA is not part of the the targets mentioned in Fiscal Responsibility and Budget Management Act (FRBM) .
- Loans under WMA are to be returned back within 90 days.
- States and centre both pay interest linked to the repo rate on WMA withdrawals.
- If the WMA exceeds 90 days,there is provision of Overdraft facility .
- In case of overdraft,the interest rate will be charged 2 percentage points more than the repo rate.
WMA for states :
In case of states ,WMAs can be of two types - normal and special.
Normal WMAs :
- Advances by RBI are without any collateral (G-Sec).
- In normal WMA, the rates are linked to Repo Rate
- The limits for Ways and Means Advances are decided by the government and RBI mutually and revised periodically.
Special WMAs:
- Special WMA are secured advances provided by RBI to the state against the G-Sec held by the state.
- The operative limit for special WMA for a State is subject to its holdings of Central Government dated securities subjected to a maximum of the limit sanctioned.
- The interest rate for SDF is one percentage point less than the repo rate.
- After the state has exhausted the limit of SDF, it gets normal WMA.
Overdraft facility:
- When state exceeds its SDF and WMA limits, there is provision of the Overdraft facility.
- The withdrawal above the WMA limit is considered an overdraft.
- The interest rate for overdraft is repo plus 2% given that it comes under the WMA limit.
In case of gradation of interest rates:
overdraft facility >Normal WMA >Special WMA
