MSS hike might reverse CRR decision
The government has announced a significant increase in the Market Stabilisation Scheme, from `30,000 crore to `6 lakh crore — a move that is set to not only help suck out the excess liquidity (currency in banks) due to demonetisation, but will also address the fundamental problem of balancing assets and liability.
NEW DELHI: The government has announced a significant increase in the Market Stabilisation Scheme, from `30,000 crore to `6 lakh crore — a move that is set to not only help suck out the excess liquidity (currency in banks) due to demonetisation, but will also address the fundamental problem of balancing assets and liability.
“But it may lead to a reversal of the recent CRR increase to 100%, may impact bank lending and hence dampen new investments,” pointed out Jaijit Bhattacharya, Partner, KPMG. The Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of customers, which commercial banks have to hold as reserves either in cash or as deposits with the Reserve Bank of India.
However, the hike of the MSS is valid only for 28 days. Under the scheme, the RBI will issue cash management bills (CMB) and an auction of 28 days’ CMB will be done using the multiple price auction method.
“The increase in MSS is aimed to ensure the banking system goes back to its pre-November 8 status, so that banking can be done normally,” said Santosh Kumar Mehrotra Professor of Economics, at JNU.
The government also seems to be aware of the problems for RBI with higher liquidity. The CRR was increased in anticipation that in addition to the demonetised currency deposited in the banks, a lot of bonds that RBI had sold to the public sector banks were maturing in January. That money would have also gone back to the banks, increasing liquidity even further.
The MSS tool was introduced in 2004, primarily to manage government securities and is a kind of bond through which commercial banks can park their funds with the RBI.
“When government securities are sold, the money goes back to the government. So there is always pressure on RBI due to the fiscal deficit issue to sell government securities and, sometimes, to suck out fiscal liquidity,” pointed out Seema Sharma, Senior Economist with IIT Delhi.
However, the money is not going to the government, but will remain with RBI ruling out any fiscal issues. The move is only going to reduce the availability of money with commercial banks.
“But soon, the banks will have to reduce rates to ensure that people take money from banks and invest in economic activity, which in turn will begin income generation in the economy,” said Sharma.