The Hindu : Market Stabilisation Scheme: RBI to issue T. Bills, dated securities

Online edition of India's National Newspaper
Sunday, Mar 28, 2004

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Market Stabilisation Scheme: RBI to issue T. Bills, dated securities

By Our Special Correspondent

CHENNAI, MARCH 27. The money proposed to be raised by the Reserve Bank of India under the just launched Market Stabilisation Scheme (MSS) will be held in a separate identifiable cash account and maintained and operated by the RBI at the Central Account Section in Nagpur.

Under a memorandum of understanding between the Government and the RBI, the amount so credited into an independent account will be appropriated only for the purpose of redemption and/or buy-back of the treasury bills and/or dated securities issued under the MSS.

While laying out the operational modalities of MSS, the MoU has clarified that ``payments on interest and discount shall not be made from the MSS account''. Likewise, receipts due to premium and/or accrued interests shall also be not credited to the MSS account. According to the MoU, such receipts and payments will be shown in the budget and other related documents as distinct components under separate heads.

The MSS will go operational from April 1. The apex bank and the Government have fixed a ceiling of Rs. 60,000 crores under the MSS for 2004-05. For the subsequent years, such limits will be mutually agreed upon between the two. Under the MoU, there will also be a threshold limit within the overall ceiling of Rs. 60,000 crores. For 2004-05, the threshold limit is Rs. 50,000 crores. Once the threshold limit is reached, the RBI will move the Government for raising the ceiling. Within the ceiling, the RBI may decide the amount, tenure, modalities and timing of the issue of such treasury bills and/or dated securities. No doubt these may be indistinguishable from those under the normal market borrowing programmes. Yet, as mentioned above, these will be accounted independently by the apex bank and the Government.

The RBI had already released an indicative programme to raise Rs. 35,500 crores under the MSS for April-June 2004. The borrowing under the MSS programme will be in addition to the normal issuance of treasury bills and dated securities.

A working group of the RBI on instruments of sterilisation has suggested the establishment of MSS. The group felt that the existing instruments used by the apex bank "may become inadequate to tackle the situation arising out of the current level of forex inflows". The working group was constituted in the wake huge inflow of forex and following depletion of government securities in RBI's portfolio. This, it was pointed out, had indeed constrained the capacity of RBI to effectively sterilise the monetary impact of sustained capital inflows.

Besides the tentative borrowing programme under the MSS, the RBI has announced a market borrowing scheme to mop up Rs. 59,000 crores between April and September. Depending upon the response, the apex bank expects floating rate bonds to constitute about 10-20 per cent of the total issuance of Rs. 59,000 crores.

It is expected that States, too, will raise Rs. 12,000 crores by way of additional market borrowing in the first-half of the next financial year to pre-pay high cost Central Government debt.

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