Thiruvananthapuram: The Finance Department is rethinking its usual practice of resorting to massive open market borrowings to manage the mismatch in cash inflows and outflows when it has considerably cheaper source of funds in the form of ‘special drawing facility’ against the Government of India securities held by the state.
The SDF is the cheapest source of funds at the State's disposal. The interest charged on SDF is the repo rate minus one percent; since repo rate is at a seven-year low of 6 percent, the SDF rate works out to only 5 percent. When open market borrowing is frontloaded or in other words a substantial share of the money is borrowed very early, like in the case of the ongoing fiscal, the effective interest rate on the borrowings will touch 6 percent or more.
(The state has almost exhausted its open market borrowing (OMB) limit this fiscal; a state could borrow three percent of its GDP from the open market. The ceiling for 2017-18 is Rs 20,400 crore. Already, Rs 14,000 crore has been secured, of which Rs 8500 crore was borrowed during the Onam season. The problem is, the LDF had used up Rs 6000 of its 2017-18 OMB quota during 2016-17 itself. This means, the state can borrow just Rs 400 crore more from the open market during the remaining part of the fiscal.)
This has happened in 2014-15 also when the effective interest rate on the OMB swelled to 5.27 and resulted in a negative return on investment. But then, the interest rate on 14-day Intermediate Treasury Bills (ITBs), into which the state invests its surplus funds, was 5 percent. But now, the return on ITBs has been reduced to 3.5 percent. So it is a double whammy, a lower return from ITBs and a higher outgo as interest for open market borrowings.
“It is this waning attractiveness of ITBs that has prompted the Finance Department to think of instruments other than open market borrowings to manage the mismatch in cash flows,” a top Finance Department official said. The Department will also explore the use of the Ways and Means Advance, which has now been raised to Rs 1215 crore from Rs 525 crore. It also has an interest lower than the OMB funds.
