The financial markets, particularly the bond markets, have been asking questions around government cash balances. Given the size of the government, these cash balances create frictions in the market liquidity conditions.
The surplus of inflows over outflows leads to government surpluses which keeps liquidity comfortable, and eases money market rates. However, in case of outflows being larger than inflows, the money markets come under pressure and the government also resorts to Ways and Means Advances (WMA) from the RBI. There is a reason the markets are always trying to figure and project government cash balances.
These cash balances arise from the government’s Public Accounts. The government taxes and expenditure are recorded in the Consolidated Fund of the Budget. On the other hand the Public Account gets receipts and incurs expenditure on account of the national small savings fund, the state provident funds, etc. The government projects the inflows and outflows in the Public Account in its Budgeted Estimates (BEs). This leads to a BE for the cash balances as well which is used as a source of financing the fiscal deficit.
As the government receives cash and disburses cash in the year, it seems to follow a rule regarding management of these cash flows. It keeps 10 percent of the cash against the budgeted amount and the surpluses and deficits are adjusted towards the cash account. We can see this in the latest fiscal accounts data available till December 2020.
The above table shows that the government had budgeted a cash balance increase of Rs 53002 crore for 2020-21. However, the cash balance till December had decreased by Rs 4989.9 crore, and the government is also using the large investment of surplus cash worth Rs 1.81 lakh-crore for meeting the deficit targets. If we add the surplus cash-flow of Rs 50,573 crore at the start of the year, the total surplus cash deposits at the RBI at end of December was Rs 2.32 lakh-crore (see CGA accounts for details).
Further, Budget 2021 has decreased the cash balances for 2020-21 — from an increase of Rs 53,002 crore (BE) to Rs 17,358 crore as per revised estimates. What does this mean for liquidity and markets going ahead? Before answering this question, let us see the RBI side of the story.
As per the RBI Act, the government is required to keep minimum of Rs 100 crore with the RBI. The surplus in the public account leads to surplus cash balances which are reported regularly in the RBI’s Weekly Statistical Supplement (WSS) with a lag of one week. Over the years the government has been maintaining larger cash balances which are not really reported in the WSS. The RBI has been trying to bring more transparency in reporting these cash balances. In 2014, the government agreed to auction its surplus cash balances.
The big change in transparency came in November 2019 when an RBI Working Group asked the RBI to release data on both systemic and durable liquidity. The systemic liquidity would include the RBI’s daily and long-term liquidity operations and Cash Reserve Ratio Balances. The durable liquidity will comprise systemic liquidity and government cash balances. The group also proposed that the RBI starts to publish the durable liquidity figures with a fortnight lag.
Accordingly, the RBI began to publish this data from January 31, 2020 in its daily Money Market Operations (MMO) giving market participants some insights on evolution of cash balances. The graph below shows us the imputed cash balances which have swung from negative in the period January 2020 to May 2020 which implies the government was accessing the WMA to positive balances in the period June 2020 to January 2021.
This implies that the cash surpluses have averaged around Rs 2.25 lakh-crore since July 2020. It is also interesting to note that the government has preferred to keep higher cash balances in the pandemic situation and not preferring to spend the balances. However, these large cash balances have helped the government keep its fiscal deficit to 9.5 percent of GDP. Else not just the deficits would have been higher but it would have led to higher borrowing as well. Clearly, the government was worried over the fiscal situation.
What does all this mean for liquidity and markets going ahead? This depends on the economic recovery and the pandemic conditions.
Most economic data indicate a sharp recovery which has provided comfort to the government. December saw record GST collections of Rs 1.15 lakh-crore, highest since the start of GST. The government has also announced an additional borrowing of Rs 80,000 crore taking the gross borrowing for 2020-21 to Rs 12.8 lakh-crore.
Based on revised estimates, the government actually expects to contribute Rs 17,358 crore to the cash balances. Overall, the government has room to cut down its cash balances given the rise in taxes and bond receipts. The release of the balances could lower interest rates whereas the additional borrowing pushes interest rates upwards.
The onus is now on the RBI to grapple through these multiple conflicts as it is usually the case.
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