In a bid to give fire-power to rein in the rupee, the government of India, in consultation with the Reserve Bank, has further revised the ceiling for the outstandings under the Market Stabilisation Scheme (MSS) by Rs 50,000 crore for the year 2007-08 to Rs 2 lakh crore. The threshold at which the ceiling will be reviewed in future will now be Rs 1.85 lakh crore.
The issue ceiling for MSS bonds, which the central bank could use to mop up funds released by its intervention to cap the rupee, was Rs 1.5 lakh crore ($37.7 billion).
With the MSS auction of dated security and treasury bills held on Wednesday, the MSS outstanding (face value) will be at Rs 1,44,940 crore as on October 5, 2007.
The ceiling has already been increased three times this year, by a total of Rs 70,000 crore.
The Reserve Bank, under the existing arrangements, subject to variations in liquidity, announces every Friday the auctions under the MSS, covering the treasury bills and dated securities, if any, for the succeeding week. These arrangements will continue until further notice.
Market had anticipated such a move on Wednesday after finance minister P Chidambaram had said that the Centre would review a limit on intervention bonds if asked by the central bank
Analysts said that the ceiling would have to rise by at least a third if the rupee?s rise was to be checked. The rupee has risen 2% since a cut in US interest rates on September 18 boosted demand for emerging market assets. It hit a nine-year high of 39.62 per dollar last week.
The recent forex inflows post-Fed rate cut has put pressure on the rupee to rise, which the central bank tries to counter by buying dollars. It bought $38.1 billion in the first seven months of 2007. However, the intervention releases rupees into the money market, which could be inflationary if left in circulation.
MSS bonds and bills are sold to soak up these funds, a process called sterilisation, although the government then has to pay interest on the debt issues. Another option to take cash out of the market, increasing the cash reserve ratio for banks, was seen as less likely given slowing inflation and moderating bank loan growth.