RBI Raises Government’s Ways And Means Advances Limit For H1 FY21

The Reserve Bank of India has raised the limit for short term credit that the government can borrow from the central bank.

The limits for this credit facility, known as ‘Ways and Means Advances', has been raised sharply to Rs 1.2 lakh crore for the first half of 2020-21, the central bank disclosed in a release on Tuesday. This limit is set in consultation with the government. Last year, the limit was set at Rs 75,000 crore set for the first half and Rs 35,000 crore set for the second half of FY20.

The increased limit comes at a time when government expenditure is expected to rise as it battles the fallout of a spreading Coronavirus. The availability of these funds will give the government some room to undertake short term expenditure over and above its long term market borrowings. On Tuesday, the government announced that it will borrow Rs 4.88 lakh crore or 62 percent of its planned borrowings in the first half.

Ways and means advances are temporary loan facilities provided to the government to enable it 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.

The government has used this facility far more frequently in recent years.

Radhika Pandey, consultant at National Institute of Public Finance and Policy, said that the higher than usual limits may have been set as the government anticipates huge expenditure on account of upgradation of health infrastructure because of the rising cases of coronavirus across the country. In addition, the government has also announced front-loading of some direct cash transfers, such as those to farmers.

Despite the higher expenditure because of coronavirus, the government has chosen to maintain its market borrowings, choosing instead to rely on the borrowings from the central bank, Pandey said.