MSS limit increased; CRR hike concerns ease

The government on Friday raised the limit on the Market Stabilisation Scheme to Rs 2,00,000 crore (Rs 2,000 billion), easing pressure on the Reserve Bank of India to increase the cash reserve ratio.

The market has been abuzz with speculation over the last couple of days about the RBI considering the CRR hike.

The MSS limit has been raised from Rs 1,50,000 crore (Rs 1,500 billion) in the current financial year. This is the fourth time the government has raised the limit.

The move gives the RBI additional room to absorb excess liquidity in the system by issuing government bonds.

Under MSS, dated securities and treasury bills are auctioned by the RBI at the market rate and the cost of the coupon payments is borne by the government.

CRR is the proportion of deposits mobilised by banks and parked with RBI for statutory requirement. It currently rules at 7 per cent.

In the pre-credit policy meeting held earlier in the day, bankers had urged RBI not to raise the CRR and pay interest on the liquidity impounded through the earlier hikes.

Prior CRR increases have hurt banks since interest income through advances has been sluggish due to low credit offtake. Bank credit has grown only 21 per cent so far this year, against 31 per cent in 2006.

Surging foreign capital inflows have forced the RBI to mop up dollars to stem the appreciation in the value of the rupee.

In the process of buying dollars, the RBI released rupees that created excess liquidity in the system.