Stabilisation bonds to tackle excess liquidity

Govt to extend Rs 40,000cr facility to RBI

The government may extend a Rs 30,000 crore to Rs 40,000 crore facility to the Reserve Bank of India to issue bonds to suck out excess liquidity when foreign exchange inflows surge.

The market stabilisation bonds or MSBs would be tradeable in the secondary market. The maturity, amount and timing of the bond issues would be decided by the Central bank in consultation with the government, finance ministry officials said.

The interest payment on the bonds would be an indicator of the cost of managing large foreign exchange reserves. Multilateral institutions, including the International Monetary Fund, have often questioned the need to maintain big reserves.

Finance ministry officials said the bonds would have no impact on the fiscal deficit situation aside from the interest payments. The additional borrowings "will be ring-fenced and outside the Consolidated Fund of India," said a finance ministry official.

Right now, the RBI uses the daily repo facility to absorb excess liquidity and bears the cost in its own books.

The RBI would hold the account of MSBs and conduct open market borrowings on the government's behalf. "A decision on whether the securities should be accorded SLR (statutory liquidity requirement) status is yet to be taken," said the official.

Finance ministry officials are due to meet the RBI deputy governor and other officials on February 23 in Mumbai to finalise details about how the facility will work. "A decision will be taken within the next two weeks," the official said.

The RBI would issue the bonds "to primary dealers and banks, as is done normally, through a bid mechanism," the official said.

The proposed move follow a recommendation by an RBI working committee that a market stabilisation fund be set up to manage liquidity and ease pressure on the rupee.

Managing the glut

• The market stabilisation bonds will be tradeable in the secondary market
• The maturity, amount and timing of the bond issues will be decided by the Central bank in consultation with the government
• Bonds not to have many impact on the fiscal deficit situation aside from the interest payments
• The additional borrowings will be ring-fenced and outside the Consolidated Fund of India
• The RBI would hold the account of MSBs and conduct open market borrowings on the government's behalf