Union Government Raises INR 10,000 Crore Through Cash Management Bills

Union Government Raises INR 10,000 Crore Through Cash Management Bills

Cash management bills were the means through which the Central Government raised around 10,000 crore rupees from the market on 10th November, 2014. The RBI (Reserve Bank of India) conducted the 42 day CMB auction on behalf of the government and saved around 1.75 percentage points on interest for the exchequer. The government used a rarely deployed instrument called CMB which is resorted to when the exchequer faces a short term liquidity mismatch.

The government used the CMB for the following reasons. As per the Ways and Means Advance/WMA facility of the Reserve Bank of India/RBI, the government can borrow up to INR 20,000 crore till March 2015 for meeting short-term frictional cash shortfalls at the repo rate.

If the borrowing of the government exceeds this limit, an interest rate of 2 percentage points above the repo rate or 10% given the current repo rate will have to be payed by it. If funds are mobilised by the government via the CMB, a lower rate of interest in usually payed.

The government of India had decided to issue the new short term instrument known as Cash Management Bills in consultation with the Reserve Bank of India for meeting the temporary cash flow mismatches of the Indian government. Cash Management Bills are non-standard, discounted instruments issued for maturities for a duration lower than 91 days.

Cash Management Bills will have the generic character of Treasury Bills, according to official sources. The CMB will have the following features. The tenure, notified amount and date of issue of the proposed Cash Management Bills will be based on temporary cash requirement of the Government. The tenure of the proposed bill will be lower than 91 days.

Proposed CMB will be issued at discount to the face value via auctions, in terms of the Treasury Bills. Announcement of the auction of the proposed bills will be through the RBI via a separate PR to be issued one day before the date of the auction. Settlement of the auction will be from T+1 basis. Non competitive bidding scheme for treasury bills will not be extended via the Cash Management Bills.

The Bills will be tradable and qualify for the ready forward facility. Investment in the CMB will be seen as an eligible investment in Government Securities by banks for SLF purposes as per Section 24 of the Banking Regulation Act, 1949.

This move surprised bond dealers and economists, according to a ET report. Bond dealers indicated that given that there was a cash shortage in the exchequer, slippages could result if government expenditure is not controlled or divestments do not pick up pace leading to higher deficits figures as compared to budgeted 4.1%. Economists are cited by ET as saying that there is still room for the government to control expenditure and generate exchequer revenue.

In case the government mobilises funds through CMB, it pays a lower rate of interest. In the latest CMB auctions, it paid the rate of 8.25 percent per annum which saved 1.75 percentage points for the exchequer. Slightly stretched fiscal health seems to be the verdict of bond dealers, according to ET. Frictional mismatch between receipts and payments could be resolved through CMBs of varying matures as a result of this. "The cash management bill may not be worrisome, given that government has already decided to slash non-Plan expenditure by 10%," Soumya Kanti Ghosh, chief economic adviser, SBI was quoted by the Economic Times as saying. The bank, in an official note said "with significant savings on oil subsidy, possibilities of coal auctions, cut in non-Plan spending and high-end spectrum auction generating significant inflows/savings this year.”