Following the recommendations contained in the Report of the Reserve Bank of India (RBI) Working Group on Instruments of Sterilisation submitted in December 2003, the Government of India has confirmed its intention to strengthen the Reserve Bank in its ability to conduct exchange rate and monetary management operations in a manner that would maintain stability in the foreign exchange market and enable it to conduct monetary policy in accordance with its stated objectives.

In this regard the Reserve Bank has proposed to the Government of India to authorise issuance of existing debt instruments, viz., Treasury Bills and dated securities up to a specified ceiling to be mutually agreed upon between the Government and the Reserve Bank by way of a Memorandum of Understanding (MoU) under the Market Stabilisation Scheme (MSS). The bills/bonds issued under MSS would have all the attributes of the existing Treasury Bills and dated securities. The bills and securities will be issued by way of auctions to be conducted by the Reserve Bank. The Reserve Bank will decide and notify the amount, tenure and timing of issuance of such treasury bills and dated securities. Whenever such securities are issued by the Reserve Bank for the purpose of market stabilisation and sterilisation, a press release at the time of issue would indicate such purpose. For the present, the total outstanding obligations of the Government by way of bills/securities thus issued under the MSS from time to time would not exceed Rs. 60,000 crore.

The bills and securities issued for the purpose of MSS would be matched by an equivalent cash balance held by the Government with the Reserve Bank. Thus, there will only be a marginal impact on revenue and fiscal deficits of the Government to the extent of interest payment on bills/securities outstanding under the MSS. Further, the cost would be shown separately in the Budget. This would add transparency to the cost of sterilisation.

It may be noted that, as mentioned in the Reserve Bank’s Report of the Internal Group on Liquidity Adjustment Facility (LAF), the intention of introducing MSS is essentially to differentiate the liquidity absorption of a more enduring nature by way of sterilisation from the day-to-day normal liquidity management operations. The total absorption of liquidity from the system by the Reserve Bank will continue to be in line with the monetary policy stance from time to time and accordingly, the liquidity absorption will get apportioned among the instruments of LAF, MSS and normal open market operations (OMOs).