The FM’s go ahead for increasing the market stabilisation scheme bond sale limit will give much needed elbow room for the RBI to sterilise dollar inflows.
Says govt is ready to raise ceiling if the RBI requests
MUMBAI: The finance minister’s go ahead for increasing the market stabilisation scheme (MSS) bond sale limit will give much needed elbow room for the Reserve Bank of India to sterilise dollar inflows into the country.
Finance minister P Chidambaram told reporters that the government is ready to increase the MSS limit for the fourth time this fiscal year from the current Rs 1,50,000 crore if the RBI requests.
Market watchers say the hike in the MSS ceiling is needed considering the surge in foreign exchange inflows this year.
The RBI uses these auctions to suck out cash from the money markets. The central bank’s dollar buying (and resultant rupee sales) in the forex market has pushed up liquidity.
Said Manoj Swain, head fixed income trading, Standard Chartered Bank, “Inflows have been really strong, especially in the last couple of months. This move (of hiking MSS ceiling for the fourth time, if it materialises) is unprecedented, but so have been the dollar inflows”.
Foreign funds pumped in a record Rs 18,948.60 crore into the stock market in September 2007. The year so far has seen a record Rs 54,169 crore flowing into the market.
The go-ahead from the finance ministry means that government has decided to take an additional off-budget burden in the form of the interest paid on MSS.
“It will put a burden on the fiscal deficit this year and the next. With the interest rate at 7-8%, the interest outgo on these bonds is likely to be between Rs 14,000 crore and Rs 16,000 crore this year,” Swain said.
The central bank has sold Rs 1,42,000 crore worth of MSS bonds (out of the Rs 1,50,000 limit) so far this year.
Expectations are that the government will increase the MSS limit by another Rs 50,000 crore to Rs 2,00,000 crore soon. Analysts say this is the best option for the RBI in the current situation.
“MSS will give them the room to intervene. I think hiking the cash reserve ratio (CRR) has rate implications and it could lead to an arbitrage opportunity, and so increased dollar inflows into the country,” said Abheek Barua, chief economist, HDFC Bank.
Mohan Shenoi, head of treasury, Kotak Mahindra Bank said “Hiking MSS is logical due to fears of inflation as money supply is high (20.4% growth this year as against 19.6% last year). It is also a more market-related instrument unlike CRR.”
Analysts point out that the CRR has been hiked four times since December last year and it would probably be fair for the government to share some burden.
Vikas Agarwal, fixed income and forex strategist, JP Morgan said “The impact on fiscal deficit as of now is unclear because the increase in ceiling does not necessarily mean the full limit will be used. Also the buoyant revenue collections could offset the increased costs due to the interest on MSS. However one will have to continue to look out for unplanned expenditure.”
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}