Market Stabilisation Scheme bonds
- Before Proceeding towards Market Stabilisation scheme bonds, consider following concepts.
1.Cash Reserve Ratio
· Under the Reserve Bank of India Act, All scheduled Banks (section 42) are required to maintain a Cash Reserve with the RBI.
· Non scheduled banks also need to maintain a CRR, but not compulsorily with RBI.
· CRR is calculated as a percentage of Net Demand and Time liabilities with the Bank.
· No Interest is earned by Banks on CRR.
· There is no Ceiling or Floor percentage for CRR.
2. Incremental Cash Reserve Ratio.
· This is a temporary tool to mop out excess liquidity from Banks.
· The RBI said in a circular. In order to tackle the surge in deposits following demonetisation of Rs 500 and Rs 1000 notes. “On the increase in NDTL (net demand and time liabilities) between September 16 and November 11, scheduled banks shall maintain an incremental CRR of 100 per cent.
· 100% of Incremental CRR means, all Demand and Term deposit between September16 to November 11, went in RBI as Cash Reserve Ratio of Banks.
· In case of Incremental CRR also, no Interest is earned by banks.
3. Statutory Liquidity Ratio.
(Little better than CRR for a bank)
· A scheduled bank under, Section 24 of the Banking Regulation Act, 1949 has to maintain a percentage of Net Demand and time liabilities of the bank.
· SLR is maintained with bank itself (not with RBI), in the form of highly liquid Assets.
· No Floor limit of SLR, but a ceiling of 40%. This means RBI cannot increase SLR beyond 40% of NDTL of banks.
· SLR Assets: –
· Cash ;
· Gold ;
· State Development Loans (SDLs) of the State Governments
· Dated securities(long term debt instrument of Government) ;
· Treasury Bills of the Government of India(short term debt instruments);
· Any other instrument as may be notified by the Reserve Bank of India.
As you can see, here except for Cash, all other assets bring interest earnings to the Banks.
- What is Market Stabilising Scheme Bond ?
These are simple Government Bonds. But with a slight difference from Regular dated securities or treasury bills. These bonds are issued by RBI on the behalf of Government in order to mop out excess liquidity from the market (Banks) and not for raising capital for government.
- After Demonetisation Banks got over filled with liquidity, as we all were depositing our old Rs. 500 and 1000 Rs. notes in banks. Excess Liquidity can cause high Inflation, which is not a good thing for the Economy.
- That excess of money could be used by banks for providing loans and advances. But RBI was little cautious. RBI didn’t want any reckless lending by banks. So in a hurry, RBI Issued Guidelines for 100% Incremental CRR.
- Consider the following news that came in Indian Express “The Reserve Bank of India has announced an incremental cash reserve ratio (CRR) of 100 per cent for banks for the fortnight beginning Sunday in order to tackle the surge in deposits following demonetisation of Rs 500 and Rs 1000 notes. “On the increase in NDTL (net demand and time liabilities) between September 16 and November 11, scheduled banks shall maintain an incremental CRR of 100 per cent, effective the fortnight beginning November 26, 2016,” the RBI said in a circular.”
- But with this Incremental CRR, Banks were unhappy as they were losing on interest they could have earned by lending that excess money came after demonetisation. (CRR gives no Interest to Banks). Thus RBI announced sale of Market Stabilising Scheme Bonds (MSS bonds).
- With MSS bonds, Banks parked their excess money with RBI and bought these Bonds
These MSS Bonds were better than Incremental CRR, as Banks were earning interest on holding these bonds. Both the Sides benefitted with this move – Excess liquidity was absorbed and Banks also earned some Interest.