Monday, April 6, 2015

Market Stabilization Scheme (MSS)

MSS Background

In the year 2004, Foreign Institutional Investors (FIIs) started buying Indian stocks in dollars. This resulted in an oversupply of USD in Indian market.

To counter this, RBI started buying USD, and in return, supply equivalent amount of Indian Rupees (INR) in the market. This action resulted in over-liquidity in Indian market (due to rupee supply), and at the same time massive increase in forex reserves (due to dollar purchase).

This liquidity overhang situation forced the government to mop up the Rupees from the market by creating MSS Bonds.

Market Stabilization Scheme (MSS)

Under this scheme, RBI, on behalf of government, raises money from the market by providing government securities, like Treasury Bills, Dated Securities, etc.

But the difference is - the raised money doesn't go to the government account (as in normal cases). Instead, the money is stored in separate Market Stabilization Scheme Account (MSSA). The sole purpose of this scheme is to suck out the over-liquidity from the market (as in the above situation), not for government expenditure.

Note the term - 'Market Stabilization'

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