India raises market stabilisation bond issuance limit, RBI says

MUMBAI (Reuters) - India on Friday raised the limit of bonds that can be issued under a market stabilisation scheme to 6 trillion rupees ($87.84 billion) from the budgeted 200 billion rupees, laying the groundwork to absorb the extra liquidity from demonetisation.

The government, with advice from the central bank, has taken the action as the country's ban on 500 and 1,000 rupee notes had created "a significant increase of liquidity" that was "expected to continue for some time," the Reserve Bank of India said in a statement.

Market stabilisation scheme (MSS) bonds allow India's central bank to issue special bonds to remove liquidity from the financial system.

The move to raise the limit for MSS bonds during this fiscal year had been expected. It was much bigger than expected as the central bank sought enough elbow room to absorb liquidity, analysts said.

The RBI last week sharply raised the cash reserve ratio for banks to 100 percent of their deposits to absorb the liquidity being created from people depositing their old notes, and Governor Urjit Patel had said it was a temporary measure until the government could increase issuance of MSS bonds.

Benchmark 10-year bond yields rose to 6.27 percent after the news, up from its 6.21 percent close on Thursday.

($1 = 68.3050 Indian rupees)

(Reporting by Suvashree Dey Choudhury; Editing by Rafael Nam)