Market stabilisation scheme

Abstract

The Market Stabilisation Scheme (MSS) was introduced in April 2004 to provide the Reserve Bank of India with an additional instrument of liquidity management and to relieve the Liquidity Adjustment Facility (LAF) from the burden of sterilisation operations. The MSS is an arrangement between the Government of India and the Reserve Bank to mop up the excess liquidity generated on account of the accretion of the foreign exchange assets of the Bank to neutralize the monetary impact of capital flows. Under the scheme, the Reserve Bank issues treasury bills/dated Government securities by way of auctions and the cost of sterilisation is borne by the Government. The money raised under the MSS is held by the Government in a separate identifiable cash account maintained and operated by the Reserve Bank, which would be appropriated only for the purpose of redemption and/or buyback of issuances under MSS. With credit growth in the economy now showing signs of moderation, the banking system is flush with funds. Increased government spending and RBI intervention in the forex market are also fuelling liquidity in the system. In such a situation, our study looks at determining the effectiveness of the MSS in reining in the money supply in the economy vis-à-vis the other instruments of monetary policy, viz. LAF (repo and reverse repo rates) and the cash reserve ratio (CRR). The methodology we have adopted for our study is an initial data collection of FII inflows, M3 money supply in the economy and inflation rates right from 2004 to the present day. We have tried to associate these with the outstandings under the Market Stabilisation Scheme since its inception in April 2004. We have also studied the points where the ceiling of issuance of MSS bonds has been modified, to understand the reasoning behind that. Further, we have also looked at the trend in the CRR, repo rates and reverse repo rates in the same period to compare their effectiveness as opposed to the MSS. Regression and trend analyses have led us to the few conclusions and recommendations mentioned towards the end.