RBI Panel Headed by I S N Prasad Recommends 11.2% Hike in States WMA Limit

An advisory panel constituted by the Reserve Bank of India (RBI) has submitted its recommendations calling for an 11.2% increase in the aggregate Ways and Means Advances (WMA) limit for state governments and Union territories. The Advisory Committee on Ways and Means Advances to State Governments, chaired by I S N Prasad, former Additional Chief Secretary (Finance) to the Government of Karnataka, finalised its comprehensive review of state liquidity facilities, and the central bank released the report on its website for review.

The Reserve Bank confirmed that the committee was tasked with reviewing state-wise WMA limits, the Special Drawing Facility (SDF), the overdraft (OD) framework, and broader cash management arrangements between states and the central bank. The RBI stated that it will examine the panel's recommendations before taking final regulatory decisions.

Expanding State Liquidity Buffers

Ways and Means Advances are short-term loan facilities provided by the RBI under Section 17(5) of the Reserve Bank of India Act, 1934, designed purely to bridge temporary mismatches between cash inflows (revenue and tax collections) and outflows (administrative, social sector, and capital expenditures). WMAs are repayable within three months from the date of the advance.

The current aggregate WMA limit for all states and Union territories was previously raised by 28% from ₹47,010 crore to ₹60,118 crore effective July 1, 2024, following recommendations by an internal group of select state finance secretaries taking into account rising state expenditure outlays. The Prasad committee’s recommended 11.2% hike will scale the total baseline accommodation further to approximately ₹66,851 crore, offering states a broader financial cushion to tide over interim liquidity squeezes.

Key Recommendations by the Panel

The Prasad committee reviewed the structural parameters governing state finances and identified several critical operational areas:

• Formula-Based WMA Allocation: Recommended revising state-by-state allocation factors based on the latest multi-year actual expenditure data of states, adjusting for growing capital outlay obligations.
• Special Drawing Facility Linkages: Evaluated the rules linking the Special Drawing Facility to investments made by states in central government dated securities and treasury bills, as well as the Consolidated Sinking Fund (CSF) and Guarantee Redemption Fund (GRF).
• Overdraft Regulations: Reviewed operational leeway surrounding consecutive days and quarterly thresholds for remaining in overdraft, ensuring financial discipline without forcing abrupt expenditure compression.

Impact on Debt Markets and Bond Yields

The panel's proposal carries significant implications for the domestic sovereign debt market, particularly for institutional investors such as commercial banks, life insurance companies, and mutual funds that actively absorb State Development Loans (SDLs):

Smoother Market Borrowing Schedules When states encounter short-term revenue troughs—often caused by the timing gap between quarterly tax devolutions from the Centre and frontloaded capital spending—a restricted WMA limit forces them to abruptly hike weekly market borrowing through SDL auctions. An expanded WMA window prevents distress auction bunching and allows state treasuries to space out their market issuances more predictably.

Controlling SDL Yield Spreads Spreads between 10-year SDLs and the benchmark 10-year Central Government Security (G-Sec) frequently widen during liquidity crunches as market participants demand higher concessions to absorb sudden supplies. Enhanced short-term credit from the central bank reduces emergency paper supply, providing stability to primary yields and containing borrowing costs for provincial governments.

Fiscal Room for Capital Outlays States account for a substantial share of India’s public capital expenditure, especially across roads, energy, and urban infrastructure. Adequate cash-flow support ensures that ongoing capital works do not stall due to transient treasury shortfalls.

The Reserve Bank is expected to complete its stakeholder consultations and examination of the panel's proposals before issuing formal operating guidelines on the revised state-wise limits.

Tags: Reserve Bank of India Indian Debt Market State Development Loans Fiscal Policy Public Finance