Market Stabilisation Scheme (MSS)

The Market Stabilisation Scheme (MSS) is a liquidity management mechanism introduced in April 2004 through an agreement between the Government of India and RBI. Its primary objective is to absorb surplus liquidity of a more enduring nature from the banking system, particularly that arising from large capital inflows.

Background and Introduction of MSS in India

MSS was introduced in April 2004 through an agreement between the Government of India and RBI during a period marked by large foreign capital inflows. These inflows resulted in substantial accumulation of foreign exchange reserves, leading to corresponding increases in domestic liquidity.

Traditional instruments such as Open Market Operations (OMOs) were not sufficient to absorb large and persistent surplus liquidity from the banking system. Therefore, MSS was introduced as an additional instrument to absorb surplus liquidity of a more enduring nature and strengthen RBI’s sterilisation operations.

Large Capital Inflows → RBI Purchases Foreign Currency → Rupee Liquidity ↑ → Need for Sterilisation → MSS Introduced

Features of Market Stabilisation Scheme

• Absorption of Enduring Surplus Liquidity: MSS is used to absorb surplus liquidity of a more enduring nature, particularly liquidity arising from large capital inflows.
• Issue of Government Securities: Under MSS, the Government of India issues Treasury Bills and dated government securities in addition to its normal borrowing requirements. These securities, known as MSS securities, are issued through auctions conducted by RBI, subject to a ceiling mutually agreed upon by the Government of India and RBI.
• Timing, Amount and Tenure: The timing, amount and tenure of securities issued under MSS are determined by RBI, within the overall ceiling agreed between the Government of India and RBI.
• Same Features as Regular Government Securities: Treasury Bills and dated securities issued under MSS have the same features as corresponding regular Treasury Bills and dated government securities.
• Separate Cash Account: The amount raised under MSS is held in a separate cash account of the Government called the Market Stabilisation Scheme Account (MSS Account), maintained and operated by RBI.
• Used for Redemption or Buyback: The funds kept in the MSS cash account are normally used only for the redemption or buyback of Treasury Bills and dated securities issued under MSS.
  • Following the 2008 Global Financial Crisis, the original agreement governing MSS was amended in February 2009. This allowed a portion of the money held in the MSS cash account to be transferred to the normal government cash account to finance government expenditure as part of the fiscal stimulus.
• Government Bears the Carrying Cost: The interest or discount payable on MSS securities is borne by the Government, representing the carrying cost of sterilisation.