Market Stabilisation Bonds/Bills
During 2002-2004, when India received high forex inflows, RBI was buying this foreign exchange form the open market.
RBI buys dollars from the market when it feels that inflows could lead to “appreciation’ of rupee beyond its comfort level. Strengthening of local currency makes exports receive lesser rupees for the dollars they get for the exported goods. Exporters tend to raise prices in such situations which makes their goods/services “non-competitive” in nature. It also buys foreign exchange if it finds it to be a good opportunity to shore up its reserves.
When RBI was buying dollars in the open market between 2002-2004, it was increasing the supply of rupees in the market. Thus, there was need to absorb “excess liquidity” to prevent inflationary effect.
In April 2004, when YV Reddy was the governor of RBI, an MoU between RBI and Government of India was signed to help RBI “sterlise” its forex operations”. A scheme named Market Stabilisation Scheme (MSS) was launched.
The stock of government securities with RBI is limited. It is not permitted under the Act to issue central bank securities. Hence, this scheme was announced. It allowed RBI to issue a separate short-term Government of India dated securities, treasury bills or cash management bills. The dated securities/treasury bills are same as those issued for normal market borrowings. They are issued through normal auction process using e-kuber system. They can be traded in secondary markets. It helped RBI to mop up liquidity of enduring nature beyond what it could absorb under the day to day reverse repo operations of LAF.
The MoU decided to fix an annual limit for MSS operations. The limit would be decided by mutual consent between RBI and the Finance Ministry, Government of India.
The funds received by RBI after selling these securities do not provide budgetary support. They cannot be used by Government and do not form part of its borrowing.
They are deposited in a separate cash account maintained with RBI. Hence, redemption of these bonds would not lead to any additional demand of funds from Government. The major cost involved in MSS scheme would be in the form of interest payments on the outstanding bills. This interest payment will be borne by the Government of India. The amount of interest payment is shown separately in budget. This helps RBI to measure cost of sterilization in a transparent manner.
Whenever such securities are issued by the Reserve Bank for the purpose of market stabilisation and sterilisation, a press release at the time of issue would indicate such purpose.
Issuance of T- Bills under Market Stabilisation Scheme (MSS)
But, after 2008, a small portion of funds received from the sale of MSS bonds was decided to be credited directly to the Government of India to help with budgetary spending.
On December 1, 2016, Reserve Bank of India raised the ceiling for market stabilisation scheme or MSS 20 times to Rs 6 lakh crore. This was to absorb excess funds from the banking system after the government’s step to demonetise few currency notes led to huge deposits with bank.
Hence, MSS operations are used as sterilization tool used for “offsetting rupee liquidity”.
Along with MSS operations, LAF operations and regular Open Market Operations (OMO) would together help RBI to absorb liquidity.
But, it should be noted that the intention of introducing MSS is essentially to differentiate the liquidity absorption of a more enduring nature by way of sterilisation from the day-to-day normal liquidity management operations.
But, MSS has the ability to even inject liquidity back into the system if RBI decided to buy-backs the bonds issued under MSS scheme.