Market Stabilisation Scheme (MSS) | Meaning, Definition | MSS Bonds

market stabilisation scheme
www.thesisbusiness.com

Market Stabilisation Scheme (MSS) –

The Market Stabilisation Scheme (MSS) refers to a special type of instrument of monetary policy of the central bank of any country usually implemented to absorb the excess liquidity from the economy. Under this scheme (MSS), the central bank issues some securities such as treasury bills, government bonds, etc in the market on the behalf of the central government of the country so that excess liquidity can be sucked out.

The funds gathered by such activity are kept in a separate account called MSS account, also such amount isn’t used by the government or for the government expenditure.

What are MSS Bonds?

The Government Bonds issued under the Market Stabilisation Scheme are called MSS bonds. MSS bonds are the special types of bonds basically used while regular government bonds are ineffective or the objectives of regular bonds are inadequate. The maturity period of MSS bonds is shorter than regular bonds. MSS bonds have a maturity period of lesser than six months, however, the maturity period might differ and could be on the basis of the objectives of the government.

When MSS was used in India?

It was February of 2004 when the Market Stabilisation Scheme (MSS) was first utilized in India by the Reserve Bank of India. Under this scheme, MSS bonds were floated in the market to gather cash for the RBI.

At that time there was a huge inflow of dollars, this created huge liquidity in the financial system and the Reserve Bank of India had to convert those dollars into Rupees. For converting those dollars the RBI needed more funds in Rupees value,  hence RBI issued MSS bonds to collect more Rupees as the regular bonds were not available at that time. 

The MSS bonds were used in November 2016 when the demonetization had done by the Government of India. Due to demonetization, the sudden liquidity in form of old currency increased, initially the Reserve Bank of India directed all banks to maintain 100% CRR (Cash Reserve Ratio) but the banks were unhappy with the decision of RBI as banks were not earning any interest on the funds maintained as CRR. Further, the Reserve Bank of India issued the MSS bonds in the system so that all banks may get some interest on the deposited funds.

Regular bonds vs MSS bonds –

  • Regular bonds are the instruments of government borrowing and issued to meet the purpose of government expenditure whereas MSS bonds are used to manage excess liquidity.
  • The MSS bonds are shorter tenure bonds as compare to Regular bonds.
  • The funds collected from MSS bonds can not be used by Government as it might results again Liquidity excess whereas as funds collected from regular bonds are used by the government.
  • The interest payable on regular bonds may impact on the government fiscal position and revenue whereas interest payable on MSS bonds has a separate budget by the government and hence marginal impact on the Government’s revenue as the funds kept in a separate account under the RBI.

Cash Reserve Ratio (CRR) vs MSS bonds –

Cash Reserve Ratio and MSS bonds both are effective instruments to suck out liquidity and can be used to absorb excess liquidity in the system however the major difference between both are:

  • CRR is interest-free instruments, on the other hand, MSS bonds offer interest on the subscribed money which is favourable for the banking institutions.
  • MSS bonds can be used to maintain Statutory Liquidity Ratio (SLR) which is mandatory for all commercial banks.
  • MSS bonds are also allocated through an auction hence these are tradable in the secondary market.

The Reserve Bank of India, the central bank, is responsible for issuing/ re-issuing the Government securities (including MSS bonds, dated securities) on the behalf of the Government of India. The RBI is also responsible for notifications regarding such auctions held. To know the latest update regarding notifications of such activities from the Government of India you are advised to visit the official website of the Reserve Bank of India

Related Terms:

Top 10 Functions of RBI

What is Repo Rate?

What is Marginal Standing Facility?

Leave a Comment