The Hindu : Business : Features of stabilisation scheme

Online edition of India's National Newspaper
Monday, Apr 05, 2004

Business

Business

Features of stabilisation scheme

A new market stabilisation scheme is being launched this week. Will it provide relief to the RBI?

THE RECENT sharp appreciation in the value of the rupee against the U.S. dollar has drawn attention to the Reserve Bank of India's stance in managing the exchange rate of the Indian currency.

The rupee has been on a managed float with the central bank closely monitoring the changes in the rupee value and preventing excessive one-way movements.

The rupee, which had fallen to a record low of 49.08 to a dollar in June 2002, has been rallying in recent months and had closed at 43.65 on March 31 this year. The RBI's intervention in the market to prevent excessive rupee appreciation has been less frequent in recent months.

Recently the RBI Governor, Y. V. Reddy, stated that the central bank's foreign exchange policy was to allow for a market driven exchange rate and it did not have a target for the rupee. He had also stated that the RBI was keeping a close watch on inflation as international commodity prices had risen sharply, but the favourable domestic factors could be a cushion to handle such pressures. The rupee appreciation has to be seen in the context of demand and supply in the country and cross currency movements in the world.

While intervening in the forex market, the RBI had been releasing rupees for buying dollars. The rupees so released added to liquidity in the system raising inflationary expectations.

To mop up this excess liquidity, the central bank used its huge stock of government securities. But over a period this stock of securities held with RBI has come down sharply. It is in such a context that a new market stabilisation scheme (MSS) was announced recently to take care of the shortage of government securities.

The salient features of the MSS are:

The Government will issue treasury bills and/ or dated securities under the MSS in addition to its normal borrowing requirements, for absorbing liquidity from the system. These will have all the attributes of existing treasury bills and dated securities.

Specifically, these will be issued and serviced like any other marketable government securities. The treasury bills and dated securities will be issued by way of auctions to be conducted by the RBI. The Government, in consultation with the RBI, will fix an annual aggregate ceiling for these instruments. For 2004-05, the ceiling will be Rs. 60,000 crores.

The amounts raised under the MSS will be held in a separate identifiable cash account titled the Market Stabilisation Scheme Account (MSS Account) to be maintained and operated by the RBI.

The amounts credited into the MSS Account will be appropriated only for the purpose of redemption and/ or buy back of the treasury bills and / or dated securities issued under the MSS.

The payments for interest and discount will not be made from the MSS account. The receipts due to premium and / or accrued interest will not be credited to the MSS account.

The treasury bills and dated securities issued for the purpose of the MSS will be matched by an equivalent cash balance held by the Government with the RBI. Thus, there will only be a marginal impact on revenue and fiscal balances of the Government to the extent of interest payment on treasury bills and/ or dated securities outstanding under the MSS.

The RBI will be issuing treasury bills/ dated securities under MSS from April 1 and it is proposed to raise Rs. 35,500 crores worth of securities from April to June. To begin with the RBI will be conducting an auction of 6.18 per cent Government Stock 2005 (re-issue) under the Market Stabilisation Scheme for a notified amount of Rs. 5,000 crores through a price based auction using the multiple price auction method. The auction will be conducted at Mumbai on April 6.

Up to five per cent of the notified amount of the sale of the stock will be allotted to eligible individuals and institutions as per the Scheme for Non-Competitive Bidding Facility in the Auction of Government Securities.

S. Varadharajan

in Chennai

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