Besides a likely higher market stabilisation scheme (MSS) bonds limit, the government is considering a proposal to front-load its H2FY17 borrowing, which was earlier scheduled to be completed by February 10, 2017.
“The October-March borrowing may be completed ahead of schedule to drain liquidity from the banking system,” a source said.
As per the fiscal year market borrowing plan, the Centre has planned to borrow R2.45 lakh crore in the second half of the current fiscal. Out of R6 lakh crore full-year borrowings, it has already raised R3.55 lakh crore in April-September this year. Currently, the government, through the RBI, sells bonds of up to R14,000 crore-R15,000 crore in weekly auctions. This weekly limit could be enhanced to complete the borrowings ahead of schedule.
After the Centre scrapped old R500 and R1,000 notes, banks have been flooded with deposits of these high-value bills which was over R10 lakh crore at the last count. The excess liquidity in the system pulled down yields in government securities and rupee against the US dollar. Earlier, the RBI had proposed to the government to increase the so-called MSS bonds to suck out excess liquidity as its temporary measure asking banks to maintain 100% cash reserve ratio (CRR) on incremental deposits between September 16 and November 11 was criticised. The CRR move has denied any interest income to banks on these deposits.
The government had supported the temporary freeze on deposits to halt fall in yields of government securities as it had forced FII to take out funds from India to US, pulling down rupee to a lifetime low of R68.86 against the US dollar on November 24. In the current fiscal, there has been a capital outflow of around $7 billion in October-November.
For FY17, the government had agreed to issue R30,000 crore of bonds to the central bank under the MSS. The government would have to take Parliament approval to effect any change to the MSS limit, as the interest cost would be borne out by the exchequer.
MSS bonds were introduced during former RBI governor Y V Reddy’s tenure in 2005. These are typically issued by the central bank to manage liquidity operations when intervening in the foreign exchange market. When RBI buys dollars, it releases rupee liquidity in the system, which could then be mopped up by sale of MSS bonds.