The Hindu Business Line : Market stabilisation scheme turning costlier

CALL it an unintended outcome but one thing that the current round of inflation is doing is to jack up the Government's cost of "sterilisation" or mopping up of excess liquidity from the market.

Under the Market Stabilisation Scheme (MSS) in vogue since March 25, the Reserve Bank of India conducts periodic auctions of dated Government of India (GoI) securities and Treasury bills (T-Bills). While these securities/T-bills are indistinguishable from those issued under the Government's regular market borrowings programme, the difference lies in the purpose for which they are floated.

The securities/T-bills under normal borrowings are issued primarily to finance the government's fiscal deficit, i.e., the gap between its total expenditures and current revenues. The gilts floated under the MSS are, on the other hand, meant purely to suck in excess liquidity from the market, with the entire sums raised being deposited in a separate cash account maintained by the RBI. Although the Government has no right over the use of the monies mobilised through the MSS route, it is nevertheless obliged to pay the interest on them, which means absorbing the cost of sterilisation on its books.

So far, during the current fiscal, a total of Rs 25,000 crore has been mopped up through issue of dated securities under the MSS. In addition, the RBI has conducted auctions for another Rs 10,000 crore worth of 364-day T-bills and Rs 30,000 crore of 91-day bills. The outstanding stock of securities and T-bills issued under the MSS, after netting out for redemptions, comes to around Rs 54,500 crore.

But what is a source of worry for the government is the increasing cost of floating such bonds, that too, for money that it cannot use. In April, the three MSS auctions, involving sale (re-issue) of 6.18 per cent Government Stock, 2005, mobilised Rs 5,000 crore each at yields-to-maturity of 4.53 to 4.60 per cent. However, in the latest auction of August 18, the same paper realised Rs 5,000 crore at a yield of 5.53 per cent.

Similarly, in the case of 364-day bills, the cut-off prices have fallen from Rs 95.73-95.75 (implicit yields of 4.44 to 4.46 per cent) during April-May to Rs 94.89 (5.40 per cent) on the August 18 auction. And despite this near one percentage point jump in interest cost, the latest 364-day bill offering was under-subscribed by almost Rs 250 crore, against a notified amount of Rs 2,000 crore (of which Rs 1,000 crore was earmarked under the MSS).

"The way the MSS has been designed, the government has no option but to bear the extra cost that sterilisation imposes in the current inflationary scenario," said a Finance Ministry official.

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