Since its inception, the Reserve Bank of India has undertaken the traditional central banking function of managing the government’s banking transactions. The Reserve Bank of India Act, 1934 requires the Central Government to entrust the Reserve Bank with all its money, remittance, exchange and banking transactions in India and the management of its public debt. The Government also deposits its cash balances with the Reserve Bank. The Reserve Bank may also, by agreement, act as the banker and debt manager to State Governments. Currently, the Reserve Bank acts as banker to all the State Governments in India (including Union Territory of Puducherry), except Sikkim. For Sikkim, it has limited agreement for management of its public debt.

The Reserve Bank has well defined obligations and provides several banking services to the governments. As a banker to the Government, the Reserve Bank receives and pays money on behalf of the various Government departments. The Reserve Bank also undertakes to float loans and manage them on behalf of the Governments. It provides Ways and Means Advances – a short-term interest bearing advance – to the Governments, to meet temporary mismatches in their receipts and payments. Besides, like a portfolio manager, it also arranges for investments of surplus cash balances of the Governments. The Reserve Bank acts as adviser to Government, whenever called upon to do so, on monetary and banking related matters. The Central Government and State Governments may make rules for the receipt, custody and disbursement of money from the consolidated fund, contingency fund, and public account. These rules are legally binding on the Reserve Bank as accounts for these funds are with the Reserve Bank .

The banking functions for the governments are carried out by the Public Accounts Departments at the offices/branches of the Reserve Bank. As it has offices and sub-offices in 29 locations, the Reserve Bank appoints other banks to act as its agents for undertaking the banking business on behalf of the governments. The Reserve Bank pays agency bank charges to the banks for undertaking the government business on its behalf. As of now, management of public debt, including floatation of new loans, is done by the Internal Debt Management Department at the Central Office and Public Debt Office at offices/branches of the Reserve Bank. Final compilation of Government accounts, of the Centre and the States, is done at Nagpur office of the Reserve Bank which has a Central Accounts Section.

Under the administrative arrangements, the Central Government is required to maintain a minimum cash balance with the Reserve Bank. Currently, this amount is Rs.10 crore on a daily basis and Rs.100 crore on Fridays, as also at the annual account closing day of the Centre and the Reserve Bank (end of March and June).

Under a scheme introduced in 1976, every ministry and department of the Central Government has been allotted a specific public sector bank for handling its transactions. Hence, the Reserve Bank does not handle government’s day-to-day transactions as before, except where it has been nominated as banker to a particular ministry or department.

As banker to the Government, the Reserve Bank works out the overall funds position and sends daily advice showing the balances in its books, Ways and Means Advances granted to the government and investments made from the surplus fund. The daily advices are followed up with monthly statements.

All the State Governments are required to maintain a minimum balance with the Reserve Bank, which varies from state to state depending on the relative size of the state budget and economic activity. To tide over temporary mismatches in the cash flow of receipts and payments, the Reserve Bank provides Ways and Means Advances/Overdraft to the State Governments. The WMA scheme for the State Governments has provision for Special Drawing Facility (SDF) and Normal WMA. The SDF is extended against the collateral of the government securities held by the State Government. To encourage the State’s participation to the Consolidated Sinking Fund and Guarantee Redemption Fund, incremental investments in these funds are also eligible to avail SDF. After the SDF limit is exhausted, the State Government is provided a normal WMA. The normal WMA limits are based on three-year average of actual revenue and capital expenditure of the state. The withdrawal beyond the WMA limit is considered an overdraft. A State Government account can be in overdraft for a maximum 14 consecutive working days with a limit of 36 days in a quarter. The rate of interest on WMA is linked to the Repo Rate. Surplus balances of State Governments are invested in Government of India 14-day Intermediate Treasury Bills automatically in accordance with the instructions.

The Reserve Bank manages public debt on behalf of the Central and the State Governments. It involves issue of new rupee loans, payment of interest and repayment of these loans and other operational matters such as debt certificates and their registration.

To formulate borrowing programme for the year, a number of other factors are also taken into account, such as, the amount of Central and State loans maturing during the year, the estimated available resources, market appetite and the absorptive capacity of the market. The Reserve Bank also acts a cash manager to the central and the State governments. For cash management as also for liquidity management purposes, flows or changes in the Governments’ cash balances are monitored and projected based on history and experience.

• Reserve Bank of India Act, 1934
• Government Securities Regulations, 2007