New Delhi: India’s finance ministry is considering raising the limit on bonds it issues to the central bank to help it mop up a surge of liquidity in the system, a person with knowledge of the matter said.

Raising the cap on the so-called Market Stabilisation Scheme (MSS) may also help stabilize the rupee, the person said, asking not to be identified because the matter is private. The currency, which plunged to a record on Thursday, gained 0.5% to 68.43 a dollar at 9.57am in Mumbai.

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Banks have been flush with cash after Prime Minister Narendra Modi banned Rs500 and Rs1,000 notes in a bid to curb graft and ordered people to deposit the money in banks. Lenders have accumulated about Rs6 trillion in deposits and have been parking much of it with the Reserve Bank of India (RBI), triggering concern that the authority may fall short of bonds to manage its money-market operations.

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For the year to March 2017, the government had agreed to issue Rs300 billion of securities to the central bank under the MSS and the cap would be reviewed once the half-way mark was hit. As of June the government hadn’t issued any bonds, according to RBI data. Parliament would need to approve any change to the MSS limit, which is possible in the current session that started 16 November, the person said.

The finance ministry’s spokesman D.S. Malik wasn’t available for comment. The RBI’s spokeswoman couldn’t be reached on her mobile phone. Bloomberg

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