The government on Friday announced a steep increase in the limit for issue of securities under the Market Stabilisation Scheme (MSS) to R6 lakh crore from R30,000 crore earlier. This will be the highest limit for issue of securities under MSS ever.
Under the MSS window, the Reserve Bank of India on Friday auctioned cash management bills for an amount of R20,000 crore with a tenure of 28 days, which attracted 47 bids in all for notes worth R40,765 crore.
The cut-off price for the auction was R99.53 and at this price, the instruments carried an indicative yield of 6.1557%.
The weighted average price came in at Rs 99.54.
The government’s decision to increase the limit for securities issued under MSS is being viewed as a measure to mop up excess liquidity from the system and is the third such measure taken for the same purpose after the government’s earlier announcement on November 8 to demonetise high-denomination currency notes of Rs 500 and Rs 1,000.
Economic affairs secretary Shaktikanta Das said the the government can absorb extra MSS interest burden within the FY17 Budget estimate.
Some interest payments on account of MSS bonds might spill over to FY18, he added.
After the demonetisation announcement, the Reserve Bank of India (RBI) conducted numerous reverse repo auctions, through which it absorbed some of the excess liquidity by issuing short-term securities to banks in return.
This was followed by a decision to impose 100% cash reserve ratio (CRR) on all banks for deposits received between September 16 and November 11.
“If you notice, two of the involved parties have had their turns at bearing the interest burden. The RBI bore the burden when it conducted all those reverse repo auctions. Then it was the banks’ turn to bear the burden when the announcement of 100% CRR was made,” said Ashutosh Khajuria, chief financial officer and president, treasury, at Federal Bank. “The CRR burden was very stiff for the banks since it not only took away all the deposits garnered by them within that period but also made them bear the burden of 4% CRR, which was already there.”
The RBI has said that it would review its decision on the imposition of additional CRR on December 9, after which most bankers expect it to return all the deposits to banks or at least a portion of them.
“So if you see, it is now the government’s turn to bear the interest burden. The money raised through issue of CMBs (cash management bills) cannot be utilised by the state. It is kept in an account with the RBI called MSS Current Account and does not earn any interest,” Khajuria said, adding that the government would have to pay interest to the banks holding these securities. He also said that he expects the RBI to conduct auctions of CMBs very often going forward, maybe as often as every day or every other day.
Bankers concurred that as a result of all the reverse repo auctions conducted by the RBI in November, the central bank currently does not have enough securities to issue banks.
“The MSS announcement is good primarily because the RBI does not have any more bonds to give away, which puts pressure on banks in the system because they cannot lend to the RBI. But with these MSS securities, banks can lend to the RBI and earn interest on the money,” said RK Bansal, chief financial officer at IDBI Bank.
Bansal also said that this might prompt the apex bank to return all the deposits it took from banks in the form of additional CRR when it reviews the decision on December 9. “Once the currency circulation goes back to normal, people will start withdrawing more and banks’ deposits will go down. So having said that, the RBI may decide to return all the deposits, it may just decide to keep a portion of it to make sure banks have enough cash to dispense once larger withdrawals start taking place,” Bansal said.