Market Stabilization Scheme (MSS)

Updated on Jun 10, 2020

Market Stabilization Scheme or MSS is a monetary policy initiated by the Reserve Bank of India (RBI) to improve money supply or extra liquidity by selling the bonds of the Government. The crucial part of the scheme is that it is utilized as a tool to remove excess cash and money by selling the government bonds out.

Overview

Initially, the Market Stabilization Scheme was planned to extract extra liquidity from the system, which resulted in the purchase of foreign currency by the central bank in the market of foreign exchange. The international capital down poured India since 2002 which was escorted to the admiration of Indian rupees. The central banks of India interfered in the currency market by purchasing dollars as the approval was not good for the exports. To buy dollars, the reserve bank of India had to supply rupees. In such a way, the high rupees can cave way to extra liquidity which might result in inflation. To avoid such a situation, the Reserve Bank of India sells government bonds generally, which mostly depends on the amount of excess liquidity present in the system? This way, the bonds go directly to the financial organizations, and the money goes back to the Reserve Bank of India. The process of withdrawing of the extra liquidity is known as sterilization.

Objective

The bonds under the Market Stabilization Scheme are sold with the goal of giving the RBI a massive stock of capital which they can intercede for managing the liquidity ratio in the market. The Reserve Bank of India introduced this scheme in 2004 with the help of the Governor of India YV Reddy. The securities that are being released are not for the expenditure of the Government. In a system where common bonds by Government are considered insufficient, the bonds are exclusive as RBI promotes these for the Government. The bonds don’t have a long tenure; the maximum maturity period is six months or less. However, the tenure depends on the requisite.

The bonds delivered under the scheme have every quality of the already dated securities along with the obtained treasury bills. The securities will be offered in the auctions held by the Reserve Bank of India. Plus, the money acquired from the auctions will be kept by the reserve bank of India in a separate bank account named as the market stabilization scheme account or MSS Account. The capital will not be transferred to the Government under any circumstances. Because, if it goes to the hands of the Government, the money will end up spending on the economy, which will result in increasing the liquidity. The organizations who purchased the bonds will receive interests as well. However, under this scheme, the Government will assign the money from their budget to the Reserve Bank of India. This expense is known as the carrying cost for the payment of interest for MSBs.

You will be able to find the official press release by RBI here.

Features of the Bonds

The bonds issued under this scheme are securities by the Government. These are known as market-stabilizing bonds which can be used at the times of high mobility in the system. And that is why the bonds sold under this scheme are called balances. The primary ownership belongs to the Government of India even though these are sold under the regulation of the central bank of India. So typically, the bonds are sold through the reserve bank of India as these belong to the Government. For the implementation of the scheme, the Government lends the bonds or securities to the RBI, and it becomes the debtor which results in having the equal value of the balance. However, the funds occupied under the Market Stabilization Scheme will be given to RBI, and it must not be given to the Government. The reason behind this is if the ownership got transferred then the Government might use it in the economy, which will eventually lead to high liquidity. 

Frequently Asked Questions

Q. What is MSS?

MSS or market stabilization scheme is a tool under the monetary policy utilized by the Reserve Bank of India to control the liquidity and money supply in the economy of the country.

Q. Who launched this scheme?

The Government of India launched this scheme under the support of the Governor of India YV Reddy.

Q. When was this scheme launched?

The scheme was launched in 2004

Q. What is the primary purpose of this scheme?

The primary purpose of the scheme is to remove the excess liquidity from the system of the economy of India by extracting excess money supply and eradicating excess cash.

Q. What is the agreement between the Government and the RBI?

 Under this scheme, there is a proper understanding between the Reserve bank of India and Government, in which it is decided what will be the total amount’s limit for the balance issued by the RBI in a single year. According to the new policy, the managing of the liquidity in the framework of demonetization the scale of six rupees is increased by the Government.

Q. Who buys the bonds?

Various financial institutions purchase the Securities or bonds issued under the Market Stabilization Scheme. The institution gains benefits by buying these bonds.

Q. How to get the amount of interest payment?

The money that comes from the sale of bonds under the MSS scheme stays under the control of RBI. Plus, it is mandatory to pay the interest amount to the financial institutions who bought these bonds. The Government obtains funds from the budget to pay interest to the buyers. The expenses of the service interest payment procedure are known as the Carrying Costs.

Q. What is the need for the scheme to manage demonetization?

Demonetization led to a considerable amount of deposits in the banks, post demonetization a lot of capital was being deposited in the banking system. And at that time the banks couldn’t lend the money to the other customers as it was only there temporarily. Thus, the Reserve Bank of India suggested using the excess deposits as the registry. However, in this process, the banks suffered loss as they were paying the depositors interest.

To reimburse the bank, the Market Stabilization Policy has been re-established. Plus, the bank can take away the balance of extra capital occupied from the deposits. They can receive payments from interests as well.


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WRITTEN BYVarsha Verma

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