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Market Stabilisation Scheme: Ceiling hiked to Rs 6 lakh cr to tackle extra liquidity

RBI may ease incremental CRR of 100% for banks, announced on Nov 26.

By: ENS Economic Bureau | Mumbai |
December 3, 2016 1:58:44 am
Market Stabilisation Scheme, RBI, reserve bank of india, veiling hiked, CRR, Market Stabilisation Scheme, liquidity managemnet, indian express news, business news The RBI may well ease the incremental cash reserve ratio (CRR) of 100 per cent for banks announced on November 26 after the RBI’s monetary policy review on December 7.

The government has approved an increase in the ceiling for bonds issued under the Market Stabilisation Scheme (MSS) ceiling to Rs 6 lakh crore from the current Rs 30,000 crore to manage the extra liquidity fuelled by the surge in deposits after the scrapping of high-value notes on November 8.

Bonds issued by the government under this scheme are aimed at providing the central bank with a stock of securities to intervene in the market for managing liquidity. Money raised via these bonds are not used for government spending and are sequestered and maintained in a separate account. Over the years, the government has issued these bonds to absorb the liquidity arising out of huge capital inflows. This time the bonds will be used to soak excess liquidity in the local market.

The RBI may well ease the incremental cash reserve ratio (CRR) of 100 per cent for banks announced on November 26 after the RBI’s monetary policy review on December 7.

The RBI on Friday announced the auction of the 28 days Government of India Cash Management Bills for Rs 20,000 crore on Friday using ‘Multiple Price Auction’ method. CMBs will have the generic character of Treasury Bills, it said.

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After the demonetisation move, there has been a significant rise in liquidity which is expected to continue for some time, it said. “In order to facilitate liquidity management operations by the RBI in the current scenario, the government has, on the recommendation of the RBI, decided to revise the ceiling for issue of securities under the MSS to Rs 6,00,000 crore,” the RBI said.

Banks have reportedly received deposits worth around Rs 10 lakh crore since November 8. The RBI hopes to absorb a part of the surplus liquidity to the banking system, while leaving adequate liquidity with banks to meet the credit needs of the productive sectors of the economy, it said on November 26.

According to India Rating, normalisation of the CRR requirement will be gradual and staggered, as the RBI may exercise caution before releasing the mopped up Rs 300,000 crore to banks. The persistence of the surplus liquidity conditions will lead the RBI to evaluate alternatives available for liquidity sterilisation. It said cash management bills can effectively manage the liquidity, owing to their short tenor and consistency with the monetary policy stance.

Crisil said the stock of G-secs with the RBI, necessary to conduct reverse repo operations, is limited. So far, the RBI had been conducting reverse repo auctions to siphon out excess liquidity from the banking system. However, this can’t be done perpetually. Between November 8 and 25, funds parked by banks with the RBI under these auctions surged 10 time to Rs 1,50,000 crore. The deluge is so humongous and unprecedented that the RBI chose CRR over more nuanced measures.

According to economic affairs secretary Shaktikanta Das, the RBI will operate within that limit as per requirement, not as if the entire quantum of MSS would be utilised overnight. “Whatever liabilities come in this year we should be able to absorb it in Budget provisions for interest payment, which is there already in the Budget,” he said.

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