MUMBAI: The Reserve Bank of India (RBI) said it would resume the sale of market stabilisation scheme (MSS) bonds after a gap of more than 18 months to help curb inflation and absorb excess cash from the banking system.
RBI said it would start selling MSS bonds from next week and notify every Friday whether more such bonds were to be issued and their value.
As a first step the central bank will auction Rs60 billion worth of 6.65% 2009 market stabilisation bonds on 6 March, payment for which has to be made by 7 March.
The move is the latest in a string of fiscal and monetary measures taken by the government and the central bank over the past few months to turn around rising inflation, which has been hovering around two-year highs since early February.
The Congress party that leads the federal coalition faces elections in two big states later this year, and lost power in two others this week, with many people blaming widespread anger over rising prices for the defeats.
Analysts said the latest move would help sterilise surplus cash pumped into the banking system by RBI’s intervention in the currency market to cap the rupee.
“It is a very logical step. This would help absorb excess liquidity from the banking system in a more efficient way,” Indranil Pan, chief India economist at Kotak Mahindra Bank, said.
Asia’s fourth largest economy is estimated to grow by 9.2 % this year, its fastest in 18 years, and that has translated into buoyant capital flows, and fuelled a 30 % expansion in bank credit and 20 % increase in money supply.
The central bank announced the news after the markets had shut and some analysts had anticipated the move.
The 10-year bond yield ended at 7.94 % on Friday and analysts saw it rising 25 basis point in a week.
RBI last sold MSS bonds in August 2005, although it issues treasury bills under the scheme at weekly auctions, and data shows outstanding issuance is around Rs455 billion ($10.3 billion).
The Indian government slashed import duty on a string of products in the annual budget presented in Parliament on 28 February, to calm inflation.
Last month, RBI announced a 50 basis point increase in the cash reserve ratio, or the percentage of deposit that banks should park with the central bank, following a similar move in December.
The second stage of the CRR increase will take effect on Saturday, and will take the ratio to 6 %.
Analysts said the CRR is a blunt instrument as it imposes a cost on all banks, but other countries including China and South Korea have also resorted to raising the reserve requirement to curb inflation-fuelling money supply.
Inflation eased to 6.05 % on 17 February, data showed on Friday, sharply lower than the previous week’s 6.63 %. But it is still above the central bank’s comfort zone of 5.0-5.5 %.
RBI also capped the cash it would absorb via its reverse repurchase auction to a daily limit of Rs30 billion from 5 March, and said the instrument was primarily to iron out very short-term mismatches in liquidity.
Market stabilisation bonds were introduced in April 2004 mainly to absorb surplus liquidity pumped into the system due to strong capital flows.
India’s foreign exchange reserves have risen since early January by about $16 billion to $193.14 billion on 23 February, which analysts see as evidence of suspected central bank intervention in the currency market to cap the rupee.