Mumbai: Policymakers may have to raise more bonds sold under the market stabilization scheme (MSS) to drain surplus cash generated by currency market operations, DBS, a Singapore-based bank said in a research note on Tuesday.

Buying spree:Reserve Bank of India building in New Delhi. Since the beginning of fiscal 2007, RBI has bought $62.7 billion from the market.

The MSS bond ceiling has been raised three times in 2007, the latest in October. The outstanding issuance was around Rs1.74 trillion, below a self-imposed ceiling of Rs2 trillion. It is reviewed if the outstanding hits Rs1.85 trillion.

But inflows were robust, thanks to a US rate cut and a booming local stock market, pushing the local unit to near decade highs, and DBS expects the central bank to keep up with its rupee-selling tactics for the remainder of the year.

“Assuming capital flows revert to normal patterns, we would still expect $3-4 billion monthly net surplus in the coming months and, by extension, dollar-buying intervention of similar amounts," Ramya Suryanarayanan, the analyst at the bank, wrote.

“Bonds outstanding under MSS should reach $44 billion by early November and should hit $46-47 billion sometime in November or December, we reckon," the note said.

“The sterilization, however, should prove insufficient," it added. Authorities may resort to capital controls if they are unable to stem the flood of money, but the measures are unlikely to be draconian in nature as India needs huge amounts of money to fund its infrastructure needs, DBS said.

The Reserve Bank of India (RBI) has been buying dollars from the market to rein in the value of rupee vis-à-vis the greenback continuously. The rupee has risen about 15% since the beginning of the calendar year and if RBI had not been present in the foreign exchange market, it would have gone up further, eroding the income of exporters in rupee term. Since the beginning of fiscal 2007, RBI has bought $62.7 billion from the market. From January 2007, the Indian central bank has bought $84.442 billion.

For every dollar RBI buys from the market, an equivalent amount of rupees flows into the system.

The MSS bonds soak up that rupee liquidity. These bonds are outside the government of India’s annual borrowing programme, conducted by RBI, to bridge the government’s fiscal deficit.

There are three ways of draining the excess money from the system. RBI soaks daily liquidity through its reverse repo window at a cost of 6%. Another way of doing it is by raising banks’ cash reserve ratio (CRR). RBI in its mid-year review of monetary policy last month raised banks’ CRR by 50 basis points to 7.5%. Yet, another way of doing it is through the MSS bonds.

In this case, the government bears the cost of sterilization, while RBI bears the cost of draining money when it sucks out liquidity through its reverse repo window, and banks themselves bear the cost when CRR is raised.

A staff writer contributed to this story.