Rupee weakness and Ways and Means credit

Context:

• Reserve Bank of India is intent on preventing any further depreciation in the currency as the surge in COVID-19 cases hits jobs and growth.
• The rupee has already lost 2.6% against the dollar so far in April 2021, putting it on the cusp of marking its worst month since the pandemic hit the country early last year.
• The Reserve Bank of India (RBI) decided to continue with the existing interim Ways and Means Advances (WMA) scheme limit of ₹51,560 crore for all States/ UTs shall for six months i.e., up to September 30, given the prevalence of COVID-19.

Relevance:

GS-III: Indian Economy (Fiscal Policy, Growth & Development of Indian Economy, Issues Relating to Economic Development in India)

Dimensions of the Article:

1. About depreciating Rupee
2. What is WMA?
3. What is Ways and Means Advances limit?
4. Types of WMAs and Interest rates
5. Importance and advantages of higher Ways and Means Advances

About depreciating Rupee

• INR is likely to trade with a depreciating bias on the back of a stronger dollar, relatively weaker emerging market or EM currencies, muted EM inflows and rising COVID-19 cases in India.
• The rupee closed at 75.01 to the dollar, and traders said they expect it to stay in the 74.50 to 76.00 range against the greenback in the near-term.
• The RBI has committed to buying ₹1 trillion worth bonds in the April-June period in its effort to temper the rise in bond yields to help the government borrow its budgeted ₹12.06 trillion from the market at low interest rates.
• It said it would do more going forward, and this would be alongside its regular open market bond purchases and special open market operations — the simultaneous sale and purchase of government securities over different tenors — the equivalent of the U.S. Operation Twist.
• RBI’s policy priority of keeping a lid on G-sec (government bond) yields is more pressing than arresting INR depreciation. A weaker rupee helps exports and the RBI may prefer it.

What is WMA?

• The Reserve Bank of India (RBI) gives temporary loan facilities to the central and state governments. This loan facility is called Ways and Means Advances (WMA).
• When managing money, we know that cash outflows often overshoot inflows. When businesses face this, they approach banks to get working capital loans. But State governments in India either go for market borrowings by issuing securities or seek short-term funding from the RBI. Such Borrowings through WMA are to be repaid within three months and usually offered at the repo rate.
• In that sense, they aren’t a source of finance per se, thus not a part of Fiscal Deficit. Section 17(5) of the RBI Act, 1934 authorises the central bank to lend to the Centre and state governments subject to their being repayable “not later than three months from the date of the making of the advance”.

The Ways and Means Advances scheme was introduced in 1997 to meet mismatches in the receipts and payments of the government.

What is Ways and Means Advances limit?

• The limits for Ways and Means Advances are decided by the government and RBI mutually and revised periodically, usually half-yearly.
• There is a State-wise limit for the funds that can be availed via WMA. These limits depend on many factors, including total expenditure, revenue deficit and fiscal position of the State. WMA limits are revised periodically and the previous utilisation rates are considered while determining revised limits.

Types of WMAs and Interest rates

The interest levied for special WMAs are lower than the repo rate due to the backing of government securities.

Importance and advantages of higher Ways and Means Advances

The cash flow problems of State governments, which were already under stress, have been aggravated by the impact of Covid-19. With economic activity at a near standstill, there is hardly any money coming in from GST, petroleum products, liquor, motor vehicles, stamp duty or registration fee. As frontline fighters against Covid-19, many States are in need of immediate and large financial resources to deal with challenges, including medical testing, screening and providing income and food security to the needy.

• Increased WMA limit for States to borrow short-term funds from the RBI provides a financial cushion when there’s uncertainty in revenue collections due to stressed economic conditions.
• WMA can be an alternative to raising longer-tenure funds from the markets, issue of State government securities (State development loans) or borrowing from financial institutions for short-term funding.
• WMA funding is much cheaper than borrowings from markets.

-Source: The Hindu