Understanding the Market Stabilisation Scheme (MSS)
The Market Stabilisation Scheme (MSS) is a significant tool used by the Reserve Bank of India (RBI) as part of its monetary policy operations. It's designed to manage the overall money supply within the economy.
Primary Aim of Market Stabilisation Scheme
The core objective of the Market Stabilisation Scheme (MSS) is to absorb excess liquidity from the financial system.
- Excess Liquidity: This refers to a situation where there is too much money circulating in the economy. This can happen due to various reasons, such as significant inflows of foreign investment or large government spending.
- Impact of Excess Liquidity: If left unmanaged, excess liquidity can potentially fuel inflation (a general increase in prices) and cause undesirable volatility in the financial markets.
How MSS Works
To achieve its aim of absorbing liquidity, the MSS framework involves the government (through the RBI) issuing specific instruments, primarily government securities (like bonds and bills).
- When the RBI decides to use MSS, it auctions these securities.
- Banks and other financial institutions needing to manage their surplus funds purchase these securities.
- By purchasing these securities, financial institutions effectively transfer the excess money they hold back to the government/RBI.
- This process reduces the amount of money circulating in the banking system, thereby 'sterilizing' or absorbing the excess liquidity.
Analysis of Options
Let's look at why the other options are not the primary aim:
- To curb inflation using CRR operations: While CRR (Cash Reserve Ratio) is another tool RBI uses to manage liquidity and influence inflation, MSS is specifically focused on absorbing liquidity via issuing securities, not directly through CRR adjustments.
- To manage fiscal deficit with bond sales: While MSS involves selling government securities, which does raise funds for the government, its *primary* goal is liquidity management, not fiscal deficit reduction. The funds raised might indirectly help, but it's not the main purpose.
- To control long-term inflows via forex trade: MSS primarily deals with managing domestic liquidity. While managing liquidity can indirectly affect exchange rates or be influenced by foreign inflows, its direct mechanism isn't controlling forex trade itself.
Conclusion
Therefore, the most accurate description of the Market Stabilisation Scheme's main purpose is its role in soaking up excess money from the economy by issuing government securities.
Important Questions from Money and Banking
Which one of the following is likely to be the most inflationary in its effects?
Which one of the following effects of creation of black money in India has been the main cause of worry to the Government of India?
Consider the following statements :
The effect of devaluation of a currency is that it necessarily
1. improves the competitiveness of the domestic exports in the foreign markets
2. increase the foreign value of domestic currency
3. improves the trade balance
Which of the above statements is/are correct?
Indian Government Bond Yields are influenced by which of the following?
1. Actions of the United States Federal Reserve
2. Actions of the Reserve Bank of India
3. Inflation and short-term interest rates
Select the correct answer using the code given below.
With reference to “Urban Cooperative Banks" in India, consider the following statements :
1. They are supervised and regulated by local boards set up by the State Governments.
2. They can issue equity shares and preference shares.
3. They were brought under the purview of the Banking Regulation Act, 1949 through an Amendment in 1966
Which of the statements given above is/are correct?
