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C. Shivkumar

Bangalore , March 9

FACED with a liquidity deluge, the Reserve Bank of India (RBI) is expected to deploy the market stabilisation scheme (MSS) as part of its open market operations.

The high liquidity in the markets was evident when the RBI mopped up a record Rs 50,980 crore through one-day repurchase operations on Tuesday. This is the highest amount mopped up on a single day since the beginning of its open market operations.

On Monday, the RBI siphoned out Rs 48,370 crore. Another Rs 7,300 crore was removed through 14-day repurchase operations. These aggressive interventions were prompted by the large inflows due to the multiple equity dilutions by the Government in some of the select public sector undertakings.

Bankers said that large foreign currency inflows were also taking place, despite the liberalisation of some of capital account norms. The inflows were taking place both in the current account and on the non-debt capital account.

The inflows include funds for investments in the PSUs by non-resident Indian applicants and foreign direct investment. The inflows were evident from the plunging forward premiums. Premia for 6 months and 12 months were 0.37 per cent and 0.42 per cent. Interventions in the forward market through swaps prevented premia from plunging further, bankers said.

Already the foreign exchange inflows into the markets are in the region of more than a billion dollar a week. Expectations are that during the next few days, close to $2 billion (around Rs 9,052 crore) would flow into the country, mostly in the form of non-debt capital account flows. This would mean an incremental liquidity impact of at least Rs 10,000 crore during the next few days, they added.

What has also worsened the liquidity situation was that the Government has virtually stopped all borrowings. The only borrowings that were taking place was in the form of 91-day and 364-day treasury bills. Borrowings through dated securities have stopped since the fiscal deficit for the current year is well within the revised estimates of 4.8 per cent, with the Government having surpassed the Rs 14,500-crore divestment target.

Besides, the stock of securities available with the RBI is not sufficient to mop up the liquidity.

As a result, bankers now expect the RBI to begin using the MSS of Rs 60,000 crore created last month for mopping up the excess liquidity.

The MSS is expected to be done through auction of T-bills or in the form of bonds and would be fiscally neutral since they would be backed by cash balances by the Government with the RBI. Initial expectations are that the MSS would be mostly through the T-bills route, bankers said. This was because the current liquidity influx was partly created by the phenomenal response to the PSU dilution.

The coupons on the MSS bills are therefore likely to be below the current repo rate of 4.5 per cent, the bankers said. Estimates are that, given the current liquidity situation in the markets, the coupons were likely to be at least 25 to 50 basis points below the repo rate.

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