Why the Reserve Bank of India Raises the Government’s WMA Limit

The Reserve Bank of India (RBI) periodically assesses the financial needs of the Indian government and adjusts the Ways and Means Advances (WMA) limit. This adjustment is particularly crucial in times of economic stress, such as the ongoing Covid-19 pandemic, where the government faces a tight fiscal position.

The Role and Purpose of WMA

Ways and Means Advances are short-term borrowings provided to both the central and state governments by the RBI. These advances are offered to cover the temporary mismatches between the government’s revenue receipts and its expenditure. However, the availability of these funds is subject to upper limits that are determined based on specific parameters.

Impact of the Limit Increase

Raising the WMA limit provides the government with greater flexibility and additional funds to manage its finances during challenging situations, such as economic lockdowns. This adjustment enables state governments to better handle situations where their revenue receipts are affected.

Agreement and Process

The adjustment in the WMA limit is not a unilateral decision by the RBI. It is based on an agreement that is entered into every year in April, between the RBI and the government. This collaborative approach ensures that the limit is aligned with the fiscal and economic realities of the country.

Key Benefits and Considerations

The raising of the WMA limit offers several key benefits:

It helps the government tide over temporary financial mismatches during times of economic crisis. It provides additional liquidity support to states, enabling them to meet their financial obligations even when revenue receipts are affected. It reflects the RBI’s proactive role in supporting the government’s financial management in times of need.

However, the government must use these funds responsibly to ensure fiscal sustainability and avoid adverse long-term financial implications.

Conclusion

The adjustment in the WMA limit is a critical move by the RBI to support the government’s finances during times of economic stress. This collaborative approach, entering into an agreement every year, highlights the importance of a balanced and sustainable approach to fiscal management.

Understanding and properly managing the WMA limit is essential for both the government and the RBI to navigate economic challenges effectively.