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Consider the following mechanisms of accessing credit :
1. Issue of dated Government securities to the public
2. Issue of Treasury Bills to the public
3. Ways and Means Advance facility from RBI
4. Issue of dated Government Securities to RBI
In the context of the Government of India, through which of the above mechanisms does the Government finance its deficit ?
- a)1, 2 and 3 only
- b)1, 2 and 4 only
- c)3 and 4 only
- d)1, 2, 3 and 4
Correct answer is option 'A'. Can you explain this answer?
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Consider the following mechanisms of accessing credit :1. Issue of dat...
Government of India Deficit Financing Mechanisms:
Issue of dated Government securities to the public:
- The Government of India can issue dated Government securities to the public as a way to finance its deficit. These securities are essentially bonds issued by the government which carry a fixed interest rate and have a maturity period.
- Investors purchase these securities, providing the government with the necessary funds to cover its deficit. The government then pays back the principal amount along with the interest on the maturity date.
Issue of Treasury Bills to the public:
- Treasury bills are short-term debt instruments issued by the government to raise funds for short periods, typically less than one year. These bills are sold at a discount and redeemed at face value.
- By issuing Treasury bills to the public, the government can access short-term funds to finance its deficit. Investors purchase these bills with the promise of receiving the face value at maturity.
Ways and Means Advance facility from RBI:
- The Ways and Means Advances (WMA) facility is a short-term borrowing arrangement provided by the Reserve Bank of India (RBI) to the Government of India.
- Under this facility, the government can borrow funds from the RBI to meet temporary mismatches in its cash flow. This provides the government with immediate access to funds to finance its deficit.
Issue of dated Government Securities to RBI:
- In addition to issuing Government securities to the public, the Government of India can also issue these securities to the RBI.
- By issuing dated Government securities to the RBI, the government can raise funds to finance its deficit. The RBI holds these securities as part of its investment portfolio and earns interest on them.
Therefore, the Government of India finances its deficit through mechanisms 1, 2, and 3 - issue of dated Government securities to the public, issue of Treasury Bills to the public, and Ways and Means Advance facility from RBI.
Issue of dated Government securities to the public:
- The Government of India can issue dated Government securities to the public as a way to finance its deficit. These securities are essentially bonds issued by the government which carry a fixed interest rate and have a maturity period.
- Investors purchase these securities, providing the government with the necessary funds to cover its deficit. The government then pays back the principal amount along with the interest on the maturity date.
Issue of Treasury Bills to the public:
- Treasury bills are short-term debt instruments issued by the government to raise funds for short periods, typically less than one year. These bills are sold at a discount and redeemed at face value.
- By issuing Treasury bills to the public, the government can access short-term funds to finance its deficit. Investors purchase these bills with the promise of receiving the face value at maturity.
Ways and Means Advance facility from RBI:
- The Ways and Means Advances (WMA) facility is a short-term borrowing arrangement provided by the Reserve Bank of India (RBI) to the Government of India.
- Under this facility, the government can borrow funds from the RBI to meet temporary mismatches in its cash flow. This provides the government with immediate access to funds to finance its deficit.
Issue of dated Government Securities to RBI:
- In addition to issuing Government securities to the public, the Government of India can also issue these securities to the RBI.
- By issuing dated Government securities to the RBI, the government can raise funds to finance its deficit. The RBI holds these securities as part of its investment portfolio and earns interest on them.
Therefore, the Government of India finances its deficit through mechanisms 1, 2, and 3 - issue of dated Government securities to the public, issue of Treasury Bills to the public, and Ways and Means Advance facility from RBI.
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Consider the following mechanisms of accessing credit :1. Issue of dat...
- Deficit financing means generating funds to finance the deficit resulting from excess expenditure over revenue. The gap is being covered by borrowing from the public through the sale of bonds or by printing new money. The below mechanisms do the Government finance its deficit:
- The Reserve Bank of India issues dated Government securities to the public on behalf of the Government, which are long-term debt instruments that mature in 5-40 years. These securities are typically used to finance the long-term requirements of the Government.
- The Government issues Treasury Bills to the public, which are short-term debt instruments that mature in less than one year. These bills are used to finance the short-term requirements of the Government.
- The Government can also avail of the Ways and Means Advance facility from the Reserve Bank of India (RBI) to meet its temporary mismatches in cash flow. This facility is essentially an overdraft facility extended by the RBI to the Government. So, Statements 1, 2 and 3 are correct.
- Dated Government securities are long-term securities or government bonds that carry a fixed or floating coupon (interest rate). Securities are issued by the government (center or state) for mobilizing funds. Financing the fiscal deficit is the most important purpose for issuing dated securities. On behalf of the government, only the RBI issues the securities, pays interest and gives back money at the maturity period.The government does not issue them to the RBI.
- RBI’s public debt office manages all these activities. The RBI sells securities through auction through the Negotiated Dealing System (NDS). They are bought by institutions known as primary dealers (Primarily dealers are mostly commercial banks, insurance companies etc.) So, Statement 4 is not correct.
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Consider the following mechanisms of accessing credit :1. Issue of dated Government securities to the public2. Issue of Treasury Bills to the public3. Ways and Means Advance facility from RBI4. Issue of dated Government Securities to RBIIn the context of the Government of India, through which of the above mechanisms does the Government finance its deficit ?a)1, 2 and 3 onlyb)1, 2 and 4 onlyc)3 and 4 onlyd)1, 2, 3 and 4Correct answer is option 'A'. Can you explain this answer?
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Consider the following mechanisms of accessing credit :1. Issue of dated Government securities to the public2. Issue of Treasury Bills to the public3. Ways and Means Advance facility from RBI4. Issue of dated Government Securities to RBIIn the context of the Government of India, through which of the above mechanisms does the Government finance its deficit ?a)1, 2 and 3 onlyb)1, 2 and 4 onlyc)3 and 4 onlyd)1, 2, 3 and 4Correct answer is option 'A'. Can you explain this answer? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Consider the following mechanisms of accessing credit :1. Issue of dated Government securities to the public2. Issue of Treasury Bills to the public3. Ways and Means Advance facility from RBI4. Issue of dated Government Securities to RBIIn the context of the Government of India, through which of the above mechanisms does the Government finance its deficit ?a)1, 2 and 3 onlyb)1, 2 and 4 onlyc)3 and 4 onlyd)1, 2, 3 and 4Correct answer is option 'A'. Can you explain this answer? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Consider the following mechanisms of accessing credit :1. Issue of dated Government securities to the public2. Issue of Treasury Bills to the public3. Ways and Means Advance facility from RBI4. Issue of dated Government Securities to RBIIn the context of the Government of India, through which of the above mechanisms does the Government finance its deficit ?a)1, 2 and 3 onlyb)1, 2 and 4 onlyc)3 and 4 onlyd)1, 2, 3 and 4Correct answer is option 'A'. Can you explain this answer?.
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