RBI seen reviewing MSS ceiling

Chances of the Reserve Bank of India seeking a hike in ceiling on the Market Stabilisation Scheme seem imminent as the threshold limit when the ceiling will be reviewed is just 60-62 bln rupees away.

Currently, the outstandings under the MSS are at Rs 813 billion, after taking into account inflow of Rs 60 billion following redemption of the 11.90 per cent, 2007 MSS bond on May 28.

After today's government bond auction of Rs 50 billion and the treasury bill auctions of Rs 25 billion under the MSS, the outstandings under MSS would rise to Rs 888 billion.

In April, when the RBI had raised the ceiling for MSS outstandings to Rs 1.10 trillion for the current financial year, it had said the threshold would be reviewed at Rs 950 billion.

"If that threshold is reached, RBI will ask for a hike. There's a chance of Rs 150-200 billion under the MSS," said A Prasanna, vice-president at ICICI Securities.

"Regular and sustained use of MSS has led to the upward revision of the issuance ceiling several times recently," said Samiran Chakraborty, chief economist at ICICI Bank.

"We are nearing the current MSS issuance limit."

The threshold limit could be closer as soon as the central bank decides on another bond issuance under MSS.

Some in the market believe that the RBI could announce auction of bonds under MSS on Friday for the next week as liquidity with banks remains huge.

"Surplus is humungous and liquidity situation will be squarish even after the tax outflows," said a dealer at a UK bank.

"So this Friday there could be an announcement of MSS auctions. It could be of around Rs 5,000 crore."

Since March, the RBI has been announcing auctions under MSS on Fridays after reviewing the liquidity situation.

But not all share the view that the RBI would announce an MSS auction this week.

"It is doubtful," said Jayesh Mehta, managing director and head of debt markets at DSP Merrill Lynch.

"Advance taxes are due next week and so there is no need for an MSS this Friday as liquidity is expected to be tight from mid-June to early July."

Around Rs 250 billion is estimated to move out of banks as taxes for the first quarter of 2007-08 (Apr-Mar).

Chakraborty of ICICI Bank also feels the announcement of the MSS auction could come next week. He expects that it could be for Rs 30-60 billion.

Timing of the auction notwithstanding, possibility of the central bank looking to raise the ceiling under MSS seems to be on the cards.

"Probability of more upward revisions is there if RBI continues to use MSS as an effective policy instrument," Chakraborty said.