Market Stabilization Scheme – Their role in economy (Detailed)
Market Stabilization Scheme (MSS): This is a scheme under which Reserve Bank of India (RBI) withdraws excess liquidity by selling the government securities to Banks and financial institutions to control the excess availability of currency in the economy. This is one of the policies that came into existence by an MOU between the Reserve Bank of India (RBI) and the Government of India with the primary objective of aiding market intervention methods of the RBI in managing the liquidity in the economy.
The money raised by RBI under MSS is kept in a separate account called MSS Account and not in the government account. Since it’s facilitation to suck out the excess money available in the market, it cannot be utilized to fund government expenditures.
History of MSS in India economy:
At one point of time during the governorship of YV Reddy, there was an increasingly flowing stream of US dollar in to the domestic economy. To control this surge, RBI has kept buying the US dollars by pumping the rupee into the market, which eventually resulted in a sense of raising inflation expectations due to the excessive availability of liquidity in the economy. To counter balance this by sucking out the excess liquidity out of the market, Market Stabilization Scheme (MSS) was introduced in 2004.
When the demonetization of Rs 500 and Rs 1,000 notes led to an upsurge in deposits, the Reserve bank of India has asked the banks to keep aside all the deposits received between 16th September 2016 and 11th November 2016 as cash reserve ratio (CRR). And later the same would be replaced by issuing bonds under MSS which could earn the banks interest. Keeping in view the necessity to issue the bonds under MSS, government has increased the total limit of MSS to 6 lakh crores from existing 30,000 crores.
How MSS is advantageous to Banks than CRR?
CRR is a percentage of total deposits that the banks have to keep with the RBI. It is a kind of contingency fund and does not earn any interest to the depositing banks. CRR limits the amount of liquidity available with the banks, thus controlling the flow of liquidity from banks into the economy.
On the other hand, as per MSS, bonds are issued to the banks against the deposits made by them. And these bonds carry certain tenure, earning returns thereon to the banks. So, certainly it was shock to the banks when RBI has asked the banks to temporarily set aside all the deposits received from 11th September 2016 to 11th November 2016. Because, the bankers have made up their mind that they would be issued the MSS bonds immediately.
Interest under Market Stabilization Scheme:
Though the issuer of the bonds is Reserve Bank of India on the face of it, these are issued on behalf of the central government. Hence, interest is paid by the central government out of its own funds.
Market stabilization Bonds – features:
- MSS involves issuance of existing debt instruments, viz., Treasury Bills and dated securities up to a specified ceiling as mutually agreed upon between the Government and the Reserve Bank
- The bills/bonds issued under MSS would carry all the attributes of the existing Treasury Bills and dated securities which be issued by way of auctions conducted by the Reserve Bank
- After consulting the government, the Reserve Bank will decide and notify the amount, tenure, and timing of issuance of such treasury bills and dated securities.