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Our Bureau

Bangalore, Nov. 1 In a bid to improve bank liquidity during the peak credit season, the Reserve Bank of India (RBI) is preparing a buy back scheme of market stabilisation scheme securities.

The RBI announced the proposal as part of its package of additional measures for monetary and liquidity management. The RBI buyback scheme is yet to be notified. But bankers expect the MSS purchase schemes to be notified during next week. MSS securities are not treated as part of the Government debt. Instead balances collected through MSS bond issues are held as a separate account with the RBI, which the Government cannot use for its own expenditure. Interest out flows on MSS balances though, are treated as part of the Government revenue expenditure.

Moreover, the MSS has been functioning as a de facto subsidy for exporters. This was because the Government incurs an interest liability on the borrowings. Consequently, redemption proposal MSS implied that the subsidies were no longer necessary, especially in a situation where the rupee has plunged over 20 per cent against the US dollar since the beginning of this financial year.

Bankers said that the MSS redemption scheme was likely to be identical to the bond buyback scheme effected in 2004 and 2005, for reducing government interest burden.

The original scheme involved purchase of bonds at prices determined by the RBI.

The new scheme is also likely to be similar in nature, sources said.

MSS redemptions arr also likely to have similar effect in reducing the government’s interest expenditure and consequently contain fiscal deficit.

Currently, the outstanding MSS securities are about Rs 1.65 lakh crore. But redemptions of MSS have already been taking place, though were insufficient to meet the liquidity requirements of the banking system.

Outstanding MSS at the beginning of this year was Rs 1.68 lakh crore.

The redemption demand was in line with what most bankers have been asking since July this year, when liquidity had begun tightening.

Bankers had argued with the RBI in July for discontinuing anticipating a liquidity tightening with the FII exits. FIIs since the beginning of this financial year have sold $9.9359 billion of investments. Bankers had said that with the FII exit, there was little need to continue with MSS, since there was no longer a need to undertake sterilisation operations in the domestic money markets.

More Stories on : Govt Bonds | RBI & Other Central Banks

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