The Hindu : RBI moots Market Stabilisation Fund

Online edition of India's National Newspaper
Wednesday, Dec 03, 2003

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Business

RBI moots Market Stabilisation Fund

By Our Special Correspondent

MUMBAI DEC. 2. The Reserve Bank India Working Group on Instruments of Sterilisation proposed to the Government to set up a `Market Stabilisation Fund,' in the Public Account, in view of the shortage of stock of Government of India Securities (G-Sec) with the Reserve Bank for sterilisation.

Sterilisation is the market based approach of the central bank aimed at neutralising part or whole of the monetary impact of foreign currency inflows. Sterilisation of dollar means buying the dollar against the rupee to prevent sharp rupee appreciation. This will inject rupees into the system. Sterilisation of rupee is containing the amount of rupee liquidity in the system by floating instruments such as G-Secs that would absorb rupee from the system.

The proposed new fund could issue a new instrument called Market Stabilisation Bills or Bonds (MSBs) for mopping up enduring surplus liquidity from the system over and above the amount that could be absorbed under the day-to-day repo operations of liquidity adjustment facility (LAF). The LAF Repo facility has also operated as an instrument of sterilisation.

MSBs may be raised through auctions and permitted to be actively traded in the secondary market. The amount raised would be credited to the Market Stabilisation Fund. The Fund account would be maintained with and managed by the RBI. The maturity, amount and the timing of issue of MSBs may be decided by the RBI in consultation with the Government depending on the expected duration and quantum of capital inflows and the extent of sterilisation of such flows.

While the Bank Rate is a medium-term interest rate signal, the repo rate is the short-term rate signal for the market.

Further the RBI's Internal Group on Liquidity Adjustment Facility (LAF) suggested that pending amendments to the RBI Act, the RBI should explore possibilities of modifying the current cash reserve ratio (CRR) provision to accommodate a standing deposit type facility for scheduled banks within its ambit that could achieve the same objective as a standing deposit facility.

The group recommends that banks may be permitted to place deposits with the RBI at their discretion over and above the required CRR deposits.

Such deposits may be treated as being placed under the standing deposit type facility and be deemed as a part of CRR with a flexible interpretation of the extant provision of the RBI Act. The distinguishing feature of the proposed standing deposit type facility is that the placement of deposits under this facility is at the discretion of banks unlike CRR which is applicable to all banks irrespective of their liquidity position.

Thus, the standing deposit type facility as a tool for residual liquidity management is more efficient as it distinguishes between banks having surplus cash balances from those that are in deficit.

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