As per the Agreement signed between the Reserve Bank of India and Government of India on September 9, 1994, the system of ad-hoc Treasury Bills is to be discontinued by 1997-98. The Budget for 1997-98 has announced the decision to introduce a new system upon the discontinuation of the ad-hoc Treasury Bills from the financial year 1997-98.

Consequently, the Reserve Bank of India and Government of India propose to enter into a fresh Agreement to give effect to the new system.

The details of the proposed system are:

• The system of ad hoc Treasury Bills to finance budget deficit will be discontinued with effect from April 1, 1997.
• A scheme of Ways and Means Advances (WMA) by Reserve Bank of India to Government of India (GOI) will be introduced to accommo date temporary mismatches in Government receipts and payments. The limit for WMA and the rate of interest on WMA will be mutual ly agreed between RBI and Government from time to time.

• Any drawals by Government from Reserve Bank of India in excess of the limit of WMA would be permissible only for ten consecutive working days. When 75 per cent of WMA is utilised, the Reserve Bank would trigger fresh floatation of Government Securities.

• Consistent with the discontinuance of Ad hoc Treasury Bills, the system of 91 Days Tap Treasury Bills will also be discontin ued with effect from April 1, 1997.

• The change over to the new system requires sophisticated system of cash management by the Government which may require Government's discussions with select Ministries like Railways and Defence. Also certain improvements in the debt management system are necessary. Therefore, a transition period of two years is envisaged. During the transition, the period of overdraft may exceed ten consecutive working days; but a higher interest rate would be applied on the overdraft amounts for the period exceed ing ten consecutive working days.

• With the discontinuance of ad hoc Treasury Bills and Tap Treasury Bills and the introduction of WMA, the concept of con ventional Budget Deficit as defined so far loses its relevance. Therefore, the practice of showing Budgetary Deficit has been discontinued instead gross fiscal deficit has become the key indicator of deficit. As a transparent way of reporting the monetised deficit, the likely extent of RBI support in respect of dated securities and auction Treasury Bills is being separately shown as the 'Monetised Deficit' in the Budget document. The actual monetised deficit at the close of the year may, however, be different from the Reserve Bank support indicated ex ante in the Budget depending upon market conditions and the open market operations of the Reserve Bank.

The new system while ensuring fiscal discipline estab lishes a reasonable mechanism of financing the day to day re quirements of Government of India. The fresh agreement will provide greater autonomy to the Reserve Bank in formulating and implementing monetary policy.

The system of issuing ad hoc Treasury Bills to finance automatically budget deficits has been in vogue since 1954-55. It was initiated as an administrative arrangement between the Cen tral Government and the Reserve Bank so that the Central Govern ment's cash balance should be maintained at a minimum level of Rs.50 crore on Fridays and Rs.4 crore on other days. To adhere to this arrangement, it had become necessary to ensure that the account replenished whenever the actual balances were below the Rs.50 crore/Rs.4 crore level, by creation of ad hoc Treasury Bills in favour of the Reserve Bank. The system resulted in direct monetisation of budget deficits and contributed to rapid monetary expansion in past years.

An agreement was signed between RBI and the Central Government on September 9, 1994 to phase out the system of ad hoc Treasury Bills over a period of three years. It was agreed that the net issue of ad hoc Treasury Bills at the end of the year 1994-95 was not to exceed Rs.6,000 crore and that, if the net issue of ad hoc Treasury Bills exceeded Rs.9,000 crore for more than ten consecutive working days at any time during the year, the Reserve Bank would automatically reduce the level of ad hoc Treasury Bills by auctioning Treasury Bills or selling fresh Government of India dated securities in the market. Subsequently, similar ceilings for the net issue of ad hoc Treasury Bills were stipulated for 1995-96 and 1996-97.

While in 1994-95 the agreement was strictly adhered to both in terms of year end level of ad hoc treasury bills as well as the intra year limit, in 1995-96 there were prolonged periods in which intra year limit was exceeded. During 1996-97 since August 14, 1996 the net issue of ad hocs has remained below within the year limit.

At the time of presentation of the Budget for 1996-97 the Finance Minister had indicated that he would present concrete proposals for phasing out the system of ad hoc treasury bills in the Budget for 1997-98.

Alpana Killawala
Deputy General Manager

Press Release : 1996-97/516