The Reserve Bank of India (RBI) on Monday raised the amount that the Union government can borrow from it for the short term to ₹2 trillion for the first half of 2020-21. The so-called Ways and Means Advances (WMA) was fixed at ₹1.2 trillion on 31 March, against ₹75,000 crore in the April-September period of the previous fiscal.

The limit was raised to tide over the situation following the covid-19 pandemic, RBI said in a statement.

The move comes after it raised the WMA limit for states by 60% over and above the level as on 31 March 2020 to help them plan their market borrowing programmes better. The limit will apply till 30 September.

WMA is a temporary liquidity arrangement with RBI that enables the Centre and states to borrow up to 90 days from the central bank to tide over mismatches between revenues and expenditure.

Separately, the Centre has allowed states to borrow up to ₹3.2 trillion in the first nine months of FY21. States will be able to raise 50% of the increased net borrowing limit in April-December. State governments have already borrowed as much as ₹44,778 crore so far this fiscal against ₹29,572 crore worth of state development loans last April.

On Friday, the government bond auction of ₹20,000 crore saw a surge in bidding interest, an indication that RBI may have intervened by placing bids via primary dealers. The weekly statistical supplement data released by RBI showed that it bought bonds and treasury bills of ₹14,660 crore in the second week of April. Although RBI’s indirect intervention is seen more as a bid to recalibrate the yield curve, it does take the central bank a step closer to direct monetization of government deficit, which includes subscribing to government bonds directly by printing money to help the government as it contends with falling revenues.

“Fiscal expansion is imperative. Given the fiscal situation we have inherited, it is a difficult path to navigate. Open market operations enable government to borrow at as low cost as possible. RBI will have to try everything possible to enable the government to do more short-term borrowing and roll it over so that the borrowing cost is kept low," said Abheek Barua, chief economist at HDFC Bank.

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