Stabilisation scheme may be reviewed

The Reserve Bank of India (RBI) is understood to be considering whether or not to continue with the market stabilisation scheme (MSS).

According to banking sources, MSS was conceived to facilitate the central bank with enough securities for conducting sterilisation operations, which suck out excess liquidity in the financial system generated by foreign exchange inflows.

Sources said while some officials feel MSS should be put on hold for the time being, others are of the view that a few instruments such as 91-day treasury bills should be continued with. This is because, money in the 91-day bill reverts to the system in a short span.

Industry sources said that the situation is different now. While inflows from the foreign direct investment and portfolio investors have come down drastically, the RBI has been selling dollars in the market to support the rupee in the range of 46.25-35 per dollar.

This has resulted in a reduction of forex reserves, which stand at around $117 billion currently from $119 billion some time back. RBI went for this strategy when oil prices started flaring up and there was a spurt in demand for dollars from oil companies who wanted to make upfront payment for crude purchases.

Demand for funds in the domestic market has also increased in the second half of the fiscal, or what in the markets parlance is called "the busy season".

According to bankers, there is a case for putting on hold the MSS programme as there might be competition for funds between corporates and the government, a significant portion of whose borrowing programme is yet to be over. To that extent corporate borrowings will suffer, added bankers.