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Home » News » Business » Govt unveils special bonds to soak demonetised funds
Govt unveils special bonds to soak demonetised funds

Govt unveils special bonds to soak demonetised funds

MUMBAI: The government on Friday created provisions to issue special bonds worth up to Rs 6 lakh crore to absorb the temporary surplus with banks created by nationwide deposits of demonetised currency, which crossed Rs 8 lakh crore last weekend.

The RBI will sell the bonds, called Market Stabilisation Scheme (MSS), to banks on behalf of the government. Although the MSS is an existing programme, the current limit was only Rs 30,000 crore, which has been hiked to Rs 6 lakh crore. Money raised by sale of these bonds cannot be used by the government and does not add to the fiscal deficit.

The first tranche of the MSS bonds on Friday drew Rs 20,000 crore at a cut-off yield of 6.16%. Armed with the new instrument to soak funds, the RBI might relax its rules of the cash reserve ratio (CRR) requirement, under which it has impounded Rs 3.2 lakh crore of bank deposits. On Wednesday, when the RBI announces the monetary policy committee’s decision on interest rates, it is also expected to provide a timeline for reducing CRR.

Although over Rs 8 lakh crore have come in as deposits post-demonetisation, the money can’t be put to long-term use as most of these are expected to be withdrawn. The surge in deposits has forced banks to invest in liquid money market instruments, causing volatility. To maintain order, it was imperative for the RBI to lock up some of the funds.

The cost of impounding these funds were first borne by the RBI, which borrowed under the reverse repo facility in exchange for bonds. On November 25, the amount parked with the RBI under reverse repo crossed Rs 5.2 lakh crore. Since the central bank was on the verge of running out of government bonds, it passed the cost onto banks by asking them to lock funds up to Rs 3.25 lakh crore in the form of cash reserves with the central bank, which would not earn any interest. This sudden change of rules created a situation where banks were incurring a loss of about Rs 50 crore every day in terms of the interest payout for the extra cash they were receiving due to demonetisation.

Now to compensate banks for these losses, the government and the RBI are issuing MSS bonds. “MSS will suffice to drain the excess liquidity from the system if managed properly,” said Soumya Kanti Ghosh, group chief economic adviser (economic research department), SBI. “We maintain that the temporary incremental CRR hike may now be withdrawn. Otherwise, the two together may work as a double whammy in terms of pushing up government securities yield and impending bank lending transmission,” Ghosh said.

Last week, RBI governor Urjit Patel had said that the unprecedented increase in CRR was a temporary measure until the government increased the limit to issue MSS bonds.

Source: TOI

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