MSS issue size fixed at Rs 50,000 cr

RBI to revisit ceiling once bonds issuance hits Rs 35,000 crore.

The Reserve Bank of India (RBI) today fixed the limit for issuing bonds under the Market Stabilisation Scheme (MSS) to Rs 50,000 crore for 2010-11.

At the same time, amid rising capital inflows, the central bank said the limit would be reviewed once bonds worth Rs 35,000 crore were issued. The annual limit comes at a time when portfolio inflows in equity and debt markets are estimated around Rs 47,000 crore so far this year.

In addition, external commercial borrowings (ECBs) have picked up and the rupee has appreciated 4.63 per cent against the dollar. From the closing level of 46.60 against the greenback on January 1, the Indian currency closed at 44.46 today.

MSS bonds are a liquidity management tool to either suck out excess liquidity or to infuse resources by unwinding bonds when liquidity comes under strain.

The recent appreciation of the rupee has already prompted RBI to intervene in the forex market to check steep volatility. However, too much intervention, which will be in the form purchase of dollars, could release large amounts of the rupee, thereby increasing liquidity in the system and make the management of inflation a more complicated task.

The current MSS outstanding balance (face value) is Rs 2,737 crore, which is due for redemption during 2010-11.

RBI had extensively used MSS bonds (unwinding) in 2008-09 and 2009-10 to pump in liquidity in the system to support the huge government borrowing programme. The government had stepped up borrowing to fund stimulus package to fight the economic slowdown. It had unwound and also sequestered MSS bonds to infuse liquidity in the system. It unwound MSS bonds worth Rs 80,340 crore in 2008-09.

GA Tadas, managing director and chief executive of IDBI Gilts, said this liquidity management instrument was going to be relevant to RBI this time. Looking at the huge amounts parked by banks at the reverse repo window, RBI may issue MSS bonds to suck out excess liquidity and contain any inflationary pressures.

This would be in contrast to the unwinding done in 2008-09 and 2009-10.

The first MSS bond issuance could happen as early as third week, around the announcement of the annual policy, said a senior treasury executive with a public sector bank.

Foreign institutional investments in the capital markets have been buoyant, which is partly responsible for the liquidity increase in the system. RBI has already begun to take out excess resources in the system by increasing the cash reserve ratio.

The average outstanding MSS balance stood at Rs 128,684 crore in 2007-08 and Rs 1,48,889 crore in 2008-09. It shrunk sharply in the nine months ended December 2009 to Rs 18,773 crore on large unwinding for managing the huge government borrowing programme.