The Government of India and the Reserve Bank of India have formally signed a Memorandum of Understanding (MoU) on February 26, 2009 to amend the MoU dated March 25, 2004 on the Market Stabilisation Scheme (MSS).

The amendment to the MoU enables, on mutual agreement between the Government of India and the Reserve Bank, the transfer of a part of the amount in the MSS cash account to the normal cash account as part of the Government's market borrowing programme for meeting Government's approved expenditure.

Following the signing of the amendment, an amount of Rs.45,000 crore will be transferred in installments from the MSS cash account to the normal cash account of the Government of India by March 31, 2009. An equivalent amount of Government securities issued under the MSS would now form part of the normal market borrowing of the Government of India.

It may be recalled that the MoU dated March 25, 2004 permits issuance of Government securities (Treasury Bills and/or dated securities) under MSS so as to sterilize excess liquidity arising from the Reserve Bank's intervention in the foreign exchange market to contain excessive exchange rate volatility in the context of large capital inflows. The amounts raised under MSS are held in a separate identifiable cash account, titled MSS cash account, with the Reserve Bank. The amount in the MSS cash account cannot be appropriated for expenditure other than redemption or buyback of the Treasury Bills and/or dated securities under the MSS.

The situation has reversed in the recent period primarily on account of change in the external accounts resulting in attendant draining of primary liquidity reflecting the impact of Reserve Bank's operations in the foreign exchange market. Consequently, the sterilized liquidity in the MSS cash account can be reversed by transferring the amount to the normal cash account of the Government.

Alpana Killawala