Friday, October 31, 2008

What is Market Stabilization Scheme?

To understand this we need to take a look at the year 2004 when FIIs (Foreign Institutional Investors) started bringing in dollars to buy Indian stocks. This has resulted in an oversupply of US dollars in the Indian market. RBI bought dollars, thus creating an equivalent amount of rupees. This dollar buying raised forex reserves from $100 bn in January 2004 to about $300 bn by 2007-08. Thus there was a liquidity overhang that was caused by the inflow of dollars. This has forced the government to mop up the rupees by creating the MSS bonds.

MSS was introduced by way of an agreement between the government and the Reserve Bank of
India (RBI) in early 2004. Under the scheme, RBI issues bonds on behalf of the government and the money raised under bonds is impounded in a separate account with RBI. The money does not go into the government account. As on October 22, 2008 the balance under MSS stood at Rs 1,71,317 crore.


4 comments:

chaitali said...

answer to the point...satisfactory !!

bhavesh mishra said...

Good explanation

Anonymous said...

brilliant!!!! need to look up what some of the terms mean though. -Adam McSweeney

G.Bhujbal said...

simple explanation.