To Suck Out Excess Bank Deposits, RBI Gets Rs 6 Lakh Crore Tool

The government has on the recommendation of the Reserve Bank of India revised the ceiling for issue of securities under the market stabilisation scheme to Rs 6 lakh crore for this fiscal year. The earlier limit was Rs 30,000 crore.

Economists say that the steep increase in the limit will benefit banks as they will earn interest by deploying the excess deposits under market stabilisation scheme bonds. In the present scenario, banks are not earning interest on the excess deposits as the RBI had earlier ordered banks to deposit their extra cash with it under cash reserve ratio requirements. Thus economists say the higher limit under market stabilisation scheme reduces the threat of a steep downward revision in fixed deposit rates. Madan Sabnavis, chief economist at CARE Ratings, expects the RBI to soon revoke its earlier decision on cash reserve ratio requirements.

The market stabilisation scheme is a tool used by the Reserve Bank of India to drain excess liquidity from the financial system through issuance of government bonds and other securities. The RBI decides the timing and tenure of such bonds.

The money raised through the market stabilisation scheme is maintained by the RBI in a separate account and can't be used for meeting government expenditure.

After banning 500 and 1,000 rupee notes last month to fight black or untaxed money, the government has allowed the deposit of old notes in banks till December 30. There has been a surge in deposits and so "there has been a significant increase of liquidity in the banking system which is expected to continue for some time," the RBI has said.

According to the latest data released by the central bank, banks have reported exchange and deposits amounting to nearly Rs 8.50 lakh crore between November 10 and November 27.

Banking stocks today pared losses after the increase in the limit under the market stabilisation scheme. The index for banking stocks Bank Nifty, which had fallen as much as 1.5 per cent, ended 1 per cent lower.

Separately, the RBI today auctioned off 28-day government's cash management bills for a notified amount of Rs 20,000 crore under the market stabilisation scheme.

Last month, the Reserve Bank in a surprise move had ordered banks to deposit their extra cash with it, in a bid to absorb excess liquidity generated by demonetisation under the cash reserve ratio or CRR requirements.

Deposits held under CRR earn no interest for banks and it had led to a selloff in banking stocks. Many analysts said they feared that unless the government sharply increased the market stabilisation scheme limits, banks would be forced to cut fixed deposit rates.