Mumbai: The Reserve Bank of India (RBI) will resume sale of bonds under the market stabilisation scheme (MSS) to absorb excess liquidity in the banking system and thereby ease inflation levels.
The RBI will sell Rs6,000 crore of 2-year bonds, Rs1,00 crore of 91 day bills and Rs1,000 crore of 182 day bills next week to absorb surplus cash from the banking system. The announcement came after the markets closed.
RBI will announce each Friday the amount of market stabilisation bonds (MSS) that it plans to sell the following week.
This will be in addition to the surplus cash RBI absorbs through reverse repo auctions paying the banks a rate of 6 per cent. While there were no repo limits until now, RBI now plans to absorb a maximum of Rs2,000 crore in its morning reverse repo auction every day and a maximum of Rs1,000 crore through the evening auction.
The move is the latest in a string of fiscal and monetary measures taken by the authorities over the past few months to tame rising inflation.
India's foreign currency reserves have risen since early January by about $16 billion to $193.14 billion as of February 23. The latest move should help sterilise surplus cash pumped into the banking system by the RBI's currency market intervention to cap the rupee amidst rising forex inflows.
The 10-year bond yield ended at 7.94 per cent on Friday and analysts saw it rising 25 basis point in a week.
RBI last sold MSS bonds in August 2005, although it issues treasury bills under the scheme at weekly auctions, and data shows outstanding issuance is around Rs45,500 crore. Market stabilisation bonds were introduced in April 2004 mainly to absorb surplus liquidity pumped into the system due to strong capital flows.