With the increased WMA limit, state governments are expected to plan their market borrowings in a better way rather than bunch up their borrowings, leading to oversupply issues.
With the Reserve Bank of India (RBI) increasing the ways and means advances (WMA) limit of states by 60% over and above the level as on March 31, states will now be able to borrow short-term liquidity from the central bank to the tune of over Rs 50,000 crore, say experts. This is expected to ease the liquidity crunch as well as the rush to raise funds through primary market auctions, which will eventually bring down market borrowing costs for states. The increased limit will be available till September 30, the RBI stated.
In the wake of the COVID-19 crisis, state governments are staring at higher-than-expected spending while revenues have taken a hit. With the increased WMA limit, state governments are expected to plan their market borrowings in a better way rather than bunch up their borrowings, leading to oversupply issues. In the first auction of fiscal year 2021, states had lined up a borrowing of Rs 37, 500 crore, leading to a significant rise in yields.
Jayanta Roy, senior vice-president and group head, corporate sector ratings at Icra, indicated in a note that following the revision in the state governments’ WMA limit by the RBI, the enhanced limit is estimated to be substantial at around Rs 51,600 crore.
The higher WMA limit is expected to temper the surge in SDL issuance by the states in H1FY21, and, therefore, contribute to some cooling of spreads compared to the alarmingly high levels seen in the last six weeks. Nevertheless, spreads of 10-year SDL relative to the same tenure of G-sec may remain appreciably higher than the 60-70 bps recorded during most of April-December 2019,” Roy stated in the note.
On April 7, nineteen states picked up a total of Rs 32,560 crore from the bond market against the notified amount of Rs 37,500 crore. Due to the massive over-supply in a single week’s time, yields on 10-year SDLs shot up by at least 50 basis points.
M Govinda Rao, chief economic advisor to Brickwork Ratings, said the move will help many states to tide over their immediate cash crunch and greater flexibility to plan their borrowings. “The front-loading of borrowings could result in higher yields evident from the recent two auction results of SDLs, where the cut-off yields crossed 8% for many states. The cut-off yield stood as high as 8.96% for Kerala SDL, maturing in 15 years. The move could help the yields to soften in addition to the other liquidity measures announced by RBI in phases recently,” Rao said.
On Friday, the central bank notified that six states are intending to raise a total of Rs 7,567 crore from the market on April 22. The notified amount is higher than what was stated in the indicative borrowing calendar at Rs 4,125 crore.