Risk Management, PRMIA

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August 10, 2007

India's Market Stabilisation Scheme ( MSS)

The Government of India, in consultation with the Reserve Bank, has further revised the ceiling for the outstandings under the Market Stabilisation Scheme (MSS) for the year 2007-08 to Rs.1,50,000 crore. The threshold at which the ceiling will be reviewed in future will now be Rs.1,35,000 crore. MSS outstanding is at Rs. 98,970 crore now.

MSS involves the issue of special 364 day treasury Bills to mop up excess liquidity in the economy. The primary source of this liquidity has in recent years been capital inflows, both FDI and Portfolio. When foreign capital flows in , the central bank resorted to buying some of them to manage the rupee volatility. When the RBI buys dollars, rupee equivalent gets into the market and causes more money in the domestic economy. MSS sterilises the excess liquidity that overheats the domestic system.

Cost

Obviously MSS has a cost. The cost is the difference between interest you pay on the MSS ( 1 year at the Yield Curve) and the return the central bank earns on its Forex reserves. Calculations point out that the difference is a few thousand crores and currently charged on the Government budget.

The cost is small in relation to the gains you get. The inflation remains under control, the exchange rate managed better and the capital flows are not artificially restricted. The recent increase in the MSS cap will only serve to keep the India story floating, at least for the time being....

Posted by sunandoroy at August 10, 2007 07:38 AM

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