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Harish Damodaran

During the current fiscal, an aggregate amount of Rs 1,12,000 crore has been "sucked out" from the market so far under MSS.

New Delhi , March 7

THE Centre is expected to incur a cost of nearly Rs 3,000 crore during the current fiscal as part of efforts to `sterilise' excess foreign exchange inflows into the economy under the market stabilisation scheme (MSS).

During 2004-05, the Centre would fork out Rs 2,968.97 crore as interest/discount payments on dated securities and Treasury bills (T-bills) issued under MSS, a figure that is estimated to rise to Rs 3,338.50 crore in the ensuing fiscal.

While the MSS bonds are indistinguishable from the dated securities/T-bills issued under the Centre's regular market borrowings programme in periodic auctions conducted by the Reserve Bank of India, the difference lies in the purpose for which they are floated.

The gilts under the market borrowings programme are issued primarily to finance the Centre's fiscal deficit, which is the gap between its total expenditure and revenue receipts (including non-debt capital).

On the other hand, the securities/T-bills floated under MSS are purely meant to suck in excess liquidity from the market, with the entire sum raised being deposited in a separate identifiable cash account maintained and operated by the RBI.

While the Centre has no right over the use of the monies mobilised through MSS - they can only be appropriated for redeeming the bonds thus issued - it is, however, obliged to pay interest on these, which means absorbing the cost of sterilisation on its books. And this cost would be almost Rs 3,000 crore this fiscal.

During the current fiscal, an aggregate amount of Rs 1,12,000 crore has been "sucked out" from the market so far under MSS, which includes Rs 25,000 crore through dated securities, Rs 21,000 crore from 364-day T-bills and Rs 66,000 crore by way of 91-day bills.

This is in addition to the Rs 80,000 crore of dated securities and Rs 24,000 crore of 364-day T-bills that the Centre has floated under its regular market borrowings programme.

The outstanding sum raised under MSS, net of redemption, stood at Rs 60,835 crore as on February 25.

While the RBI's holdings of dated securities amounted to Rs 53,904 crore on the same date, the net RBI credit to the Centre, however, worked out to minus Rs 6,881 crore after adjusting for the MSS monies and other deposits made by the Centre with the apex bank.

Compared to this, the outstanding net RBI credit to the Centre stood at Rs 36,920 crore as on March 31, 2004.

To the extent, the monies mobilised under MSS has enabled a reduction in the net RBI credit to the Centre; it has also helped offset the increase in the RBI's net foreign exchange assets, thereby curbing reserve money growth.

Also, it has provided the central bank with an additional instrument for sterilisation, particularly in a context where its own holdings of gilts have suffered huge depletion in the course of being offloaded for sucking in excess liquidity from the market.

But as the latest Budget papers show, MSS, too, has entailed a cost, to be borne ultimately by the taxpayer.

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