Modi Sarkar issues special bonds to soak up demonetised funds
The central government created provisions to issue special bonds worth up to Rs 6 lakh crore to absorb the temporary surplus with banks created by nationwide deposits of demonetised currency, which crossed Rs 8 lakh crore.
The Apex bank, RBI will sell the bonds, called Market Stabilisation Scheme (MSS), to banks on behalf of the government. Although the MSS exists, the current limit was only Rs 30,000 crore, which has been hiked to Rs 6 lakh crore.
The first tranche of the MSS bonds drew Rs 20,000 crore at a cut-off yield of 6.16%.
Although over Rs 8 lakh crore have come in as deposits post-demonetisation, the money can't be put to long-term use as most of these are expected to be withdrawn. The surge in deposits has forced banks to invest in liquid money market instruments, causing volatility. To maintain order, it was imperative for the RBI to lock up some of the funds.
Reason:
Demonetisation had created a situation where banks were incurring a loss of about Rs 50 crore every day in terms of the interest payout for the extra cash they were receiving due to demonetisation. Now to compensate banks for these losses, the government and the RBI are issuing MSS bonds.
After the sharp rise in deposits since mid-November and the abrupt hike in CRR, expectation of an MSS bond issue rose.
The central government created provisions to issue special bonds worth up to Rs 6 lakh crore to absorb the temporary surplus with banks created by nationwide deposits of demonetised currency, which crossed Rs 8 lakh crore.
- Money raised by sale of these bonds cannot be used by the government and does not add to the fiscal deficit.
The first tranche of the MSS bonds drew Rs 20,000 crore at a cut-off yield of 6.16%.
Although over Rs 8 lakh crore have come in as deposits post-demonetisation, the money can't be put to long-term use as most of these are expected to be withdrawn. The surge in deposits has forced banks to invest in liquid money market instruments, causing volatility. To maintain order, it was imperative for the RBI to lock up some of the funds.
Reason:
Demonetisation had created a situation where banks were incurring a loss of about Rs 50 crore every day in terms of the interest payout for the extra cash they were receiving due to demonetisation. Now to compensate banks for these losses, the government and the RBI are issuing MSS bonds.
After the sharp rise in deposits since mid-November and the abrupt hike in CRR, expectation of an MSS bond issue rose.
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