India's central bank said on Friday it would resume the sale of market stabilisation scheme (MSS) bonds after a gap of more than 18 months to help curb inflation and absorb excess cash from the banking system.
The Reserve Bank of India said it would start selling MSS bonds from next week and notify every Friday whether more such bonds were to be issued and their value. As a first step the central bank will auction 60 billion rupees worth of 6.65 percent 2009 market stabilisation bonds on March 6, payment for which has to be made by March 7.
The move is the latest in a string of fiscal and monetary measures taken by the government and the central bank over the past few months to turn around rising inflation, which has been hovering around two-year highs since early February.
The Congress party that leads the federal coalition faces elections in two big states later this year, and lost power in two others this week, with many people blaming widespread anger over rising prices for the defeats. Analysts said the latest move would help sterilise surplus cash pumped into the banking system by the central bank's intervention in the currency market to cap the rupee.
"It is a very logical step. This would help absorb excess liquidity from the banking system in a more efficient way," Indranil Pan, chief India economist at Kotak Mahindra Bank, said. Asia's fourth largest economy is estimated to grow by 9.2 percent this year, its fastest in 18 years, and that has translated into buoyant capital flows, and fuelled a 30 percent expansion in bank credit and 20 percent increase in money supply.
The central bank announced the news after the markets had shut and some analysts had anticipated the move. The 10-year bond yield ended at 7.94 percent on Friday and analysts saw it rising 25 basis point in a week.
The Reserve Bank last sold MSS bonds in August 2005, although it issues treasury bills under the scheme at weekly auctions, and data shows outstanding issuance is around 455 billion rupees ($10.3 billion). The Indian government slashed import duty on a string of products in the annual budget presented in parliament on Wednesday to calm inflation.
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