What is the Market Stabilisation Scheme (MSS)? - Banking Terms for Exams

Market Stabilisation Scheme

Market Stabilisation Scheme or MSS is a tool used by the Reserve Bank of India to suck out excess liquidity from the market through issue of securities like Treasury Bills, Dated Securities etc. on behalf of the government. The money raised under MSS is kept in a separate account called MSS Account and not parked in the government account or utilised to fund its expenditures.
MSS was launched to withdraw the excess liquidity in the system that was generated as a result of the RBI’s purchase of foreign currencies in the foreign exchange market. From 2002 onwards, there was a huge inflow of foreign capital into India. This led to the appreciation of rupee. Since appreciation is not good for exports, the RBI intervened in the foreign exchange market by buying dollars. To buy dollars, the RBI has to give rupees. In this way, high selling of rupees leads to excess liquidity (rupee) and thereby creating a potential for inflation. To overcome this situation, the RBI has sold government bonds on a general basis depending upon the volume of excess liquidity in the system. Here bonds go to financial institutions and money goes back to the RBI. This withdrawal of excess liquidity is called sterilization.

What securities to be sold under MSS?

           The issued securities are government bonds and they are called as Market Stabilisation Bonds (MSBs). Thus, the bonds issued under MSS are called MSBs. These securities are owned by the government though they are issued by the RBI. It is to be remembered that government is the owner of the securities. Usually, government’s securities (bonds/treasury bills) are sold or issued by the RBI as the central bank is the banker to the government.

Who purchases the MSBs?

           The securities or bonds/t-bills issued under MSS are purchased by financial institutions. They will get an interest in purchasing the securities.

How interest payments for MSBs are met?

           The money procured from selling bonds under MSS are kept with the RBI. At the same time, interest payments have to be given to the institutions who buy bond. Here, for the interest payment, the government allocates money from its budget to the RBI. This expenditure to service interest payment for MSBs is called carrying cost.

The current limit under MSS?

For the current fiscal, the RBI had fixed the ceiling under MSS at Rs 30,000 crore. However, a higher amount will be required now to contain liquidity post demonetisation.

The tools used  to suck out liquidity

Apart from issuing MSS bonds and increasing CRR, the Reserve Bank can resort to tools like reverse repo, or interest yielding short-term cash management bills that can help drain additional liquidity.