The Reserve Bank of India and the government are understood to have decided to keep the market stabilisation scheme going in the next financial year, albeit with a smaller target compared with the current fiscal.
Sources close to development said the exact target for next fiscal's MSS is yet to be worked out, but it will surely be less than the Rs 80,000 crore (Rs 800 billion) set for the current fiscal.
They also added that dated securities will not comprise a part of the MSS instruments.
This is because, sources said, liquidity will not be as abundant in the banking system in the coming financial year as this fiscal owing to the increasing demand for non-food credit.
Also, with interest rates going up globally, foreign exchange inflows are expected to be more evenly distributed among developed countries and emerging markets.
Last year, exceptionally low interest rates of assets in the developed countries pushed funds into Asia as the market there afforded interest rate arbitrage opportunities.
Interestingly, this year, the MSS mop-up has just reached Rs 60,000 crore (Rs 600 billion).
The RBI reworked the MSS scheme and kept treasury bills as the only instrument for sterilisation when liquidity shortage cropped up after it hiked the cash reserve ratio to counter rising inflation in September 2004.
The MSS was launched as one of the sterilisation instruments adopted by the RBI to absorb the surplus liquidity of around Rs 60,000-Rs 70,000 crore (Rs 600-700 billion) in the banking system.
Bills and securities issued under MSS would be matched by equivalent cash balances held by the government with the RBI so that there will be only a marginal impact on the revenue and fiscal deficits of the government -- to the extent interest payment would be done on the bills/bonds under MSS.
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