MSS bonds to fund fiscal stimulus

The Central government and the Reserve Bank of India have formally signed a memorandum of understanding (MoU) to amend the previous MoU....

Written by ENS Economic Bureau | Mumbai | Published:February 28, 2009 1:16 am

The Central government and the Reserve Bank of India have formally signed a memorandum of understanding (MoU) to amend the previous MoU (dated March 25,2004) on the Market Stabilisation Scheme (MSS),enabling the government to convert its MSS bonds to regular papers instead of going for fresh market borrowing.

The new arrangement will enable the government to finance extra expenditure incurred — in the form of stimulus packages — to perk up the economy without disturbing the market or interest rates.

Following the signing of the amendment,an amount of Rs 45,000 crore will be transferred in installments from the MSS cash account to the government’s normal cash account by March 31. An equivalent amount of government securities issued under the MSS would now form part of the normal market borrowing of the central government. This means that there won’t be additional borrowing from the market and interest rates won’t be impacted,said a banking source.

The amendment to the MoU enables the transfer of part of the amount in the MSS cash account to the normal cash account as part of the government’s market borrowing programme for meeting approved expenditure.

It may be recalled that the earlier MoU permits issuance of government securities (treasury bills or dated securities) under MSS so as to sterilise excess liquidity arising from the RBI’s intervention in the forex market to contain excessive exchange rate volatility in the context of large capital inflows. The amounts raised under MSS are held in a separate identifiable cash account,titled MSS cash account,with the RBI.

The amount in the MSS cash account cannot be appropriated for expenditure other than redemption or buyback of the treasury bills and/ or dated securities under the MSS,the RBI said.

The situation has reversed in the recent period primarily on account of change in the external accounts resulting in attendant draining of primary liquidity reflecting the impact of RBI’s operations in the forex market. Consequently,the sterilised liquidity in the MSS cash account can be reversed by transferring the amount to the government’s normal cash account,it said.

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