Central bank unlikely to hike MSS bond ceiling

The Reserve Bank of India (RBI) is unlikely to raise further the ceiling on government bonds it can issue under the market stabilisation scheme as the government borrowing is expected to sterilise excess liquidity in the banking system.

According to sources, the ceiling for MSS may not be raised at least in the next three to four months. This was discussed while deliberating on the options for raising government finance to buying the RBI's stake in the State Bank of India.

Reliable sources said that the government may increasingly resort to ways and means advances to meet the shortfall in buying the stake, which is expected to be over by the month-end.

There is no proposal to advance the government borrowing programme either through issuance of treasury bills or government bonds for raising finance.

Banking sources said since the inflation rate has dropped below 5 per cent and is expected to soften further, there is no urgent need for sterilising excess liquidity from the system.

Moreover, it is a cost-intensive proposition since the government has to pay market related interest rates on t-bills or bonds auctioned under the MSS. Gradually it is becoming a drag on the government balances, said sources.

The government has already raised around Rs 22,000 crore through sale of bills and bonds last week for buying SBI stake and is expected to mop up round Rs 15,000-20,000 crore through advance taxes this week.

While the book value of the shares have been pegged at Rs 1229 a share, the total amount for the sale is expected to work out in the range of Rs 40,000-42,000 crore based on market prices of the SBI shares, said sources.

In accordance with the provisions of the memorandum of understanding of the MSS, the annual ceiling for 2007-08 was fixed at Rs.80,000 crore against the annual ceiling of Rs.70,000 crore for 2006-07.

Later, owing to increased need for bills and bonds for absorbing excess liquidity from the market, the ceiling was raised to Rs 1,10,000 crore.

The ceiling would be reviewed after the MSS outstandings hit the threshold of Rs 95,000 crore. The outstanding t-bills and bonds under MSS amounted to Rs 86,306 crore as on June 7, 2007.