Separate market stabilisation bonds unlikely

The government may not issue separate Market Stabilisation Bonds or Bills (MSBs) "" the proposed special variety of bills or bonds "" to sterilise foreign exchange inflows.

Instead, it may use the normal dated securities and treasury bills, which form the government's annual borrowing for this purpose.

However, for accounting purposes, the government papers used for sterilation will be credited to the proposed Market Stabilisation Fund (MSF).

Essentially, this means that the cost of sterilisation will be borne by the government and not the Reserve Bank of India (RBI).

The central bank is understood to be seriously considering this suggestion. This marks a deviation from the original proposal of floating MSBs from the MSF. However, no final decision has yet been taken.

The RBI came out with two separate reports on sterilisation and liquidity adjustment facility in the first week of December and invited comments on these reports till end-December.

One of the suggestions the RBI received was to use normal dated securities and treasury bills for sterilisation purpose and this is under active consideration of the central bank.

This is possible since about Rs 90,000 crore worth of government securities are available with the RBI for sterilisation.

The other option was issuance of securities directly by the RBI. However, this is not permissible by the RBI Act. Besides, the central bank is also not in favour of this idea.

In the report it was observed that new instruments are being considered for monetary management and in the recent period, LAF repo facility has been actively acting as an instrument of sterlisation in contrast to its primary operations of managing liquidity at the margin on a day-today basis.

The report has commented that while operationally it is difficult to distinguish between the sterlisation operations and liquidity management operations under LAF , conceptually though there is need to distinguish surplus liquidity of temporary nature from surplus liquidity of somewhat "enduring" nature.

Market participants had suggested to the RBI that the bonds out of the MSBs could be floated in the form of bills of short term nature so as to not to have any adverse impact on the risk management of the portfolio.

Therefore, while the tenure of bills as recommended was ranging from three months to maximum of one year. Moreover, banks had also urged to keep these bills/ bonds out of the requirement of investment fluctuation reserve.