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Date : Mar 25, 2004
Memorandum of Understanding for Launching of the Market Stabilisation Scheme

The Government of India and the Reserve Bank of India have today formally signed a Memorandum of Understanding (MoU) detailing the rationale and operational modalities of the Market Stabilisation Scheme (MSS).

The scheme would be effective from April 2004. An advance schedule for the borrowings under the MSS for the first quarter of 2004-05 is being announced separately. The main features of the MoU are:

  1. The Government would issue Treasury Bills and/or dated securities under the MSS in addition to the normal borrowing requirements, for absorbing liquidity from the system.
  2. The Treasury Bills/dated securities issued under the MSS would have all the attributes of existing Treasury Bills and dated securities; specifically, these would be issued and serviced like any other marketable government securities and will thus be eligible securities for Statutory Liquidity Ratio (SLR), repo and Liquidity Adjustment Facility (LAF).
  3. The Treasury Bills and dated securities will be issued by way of auctions to be conducted by the Reserve Bank.
  4. The Government, in consultation with the Reserve Bank, will fix an annual aggregate ceiling for Treasury Bills and / or dated securities under the MSS. This ceiling will hold good till further revision during the course of the year. For 2004-05, the ceiling shall be Rs.60,000 crore.
  5. The actual outstandings under the MSS would not exceed the ceiling or the revised ceiling at any point of time.
  6. The amounts raised under the MSS would be held in a separate identifiable cash account titled the Market Stabilisation Scheme Account (MSS Account) to be maintained and operated by the Reserve Bank.
  7. The amounts credited into the MSS Account would be appropriated only for the purpose of redemption and / or buy back of the Treasury Bills and / or dated securities issued under the MSS.
  8. The payments for interest and discount will not be made from the MSS Account. The receipts due to premium and/or accrued interest will not be credited to the MSS Account. Such receipts and payments towards interest, premium and discount would be shown in the budget and other related documents as distinct components under separate sub-heads.

The Treasury Bills and dated securities issued for the purpose of the MSS would be matched by an equivalent cash balance held by the Government with the Reserve Bank. Thus, there will only be a marginal impact on revenue and fiscal balances of the Government to the extent of interest payment on Treasury Bills and/or dated securities outstanding under the MSS.

It may be recalled that an Internal Working Group on Instruments of Sterilisation had submitted its Report in December 2003. Following the recommendations contained in the Report, the Government of India had confirmed its intention to strengthen the Reserve Bank in its ability to conduct exchange rate and monetary management operations in a manner that would maintain stability in the foreign exchange market and enable it to conduct monetary policy in accordance with its stated objectives. On February 23, 2004, the Reserve Bank had announced the launching of the Market Stabilisation Scheme.

Alpana Killawala

Chief General Manager

Press Release: 2003-2004/1126