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What is the primary purpose of the Market Stabilisation Scheme (MSS) introduced by the RBI in 2004?
  • a)
    To regulate the functioning of the call money market
  • b)
    To absorb surplus liquidity arising from large capital inflows
  • c)
    To manage interest rate signals in the market
  • d)
    To facilitate daily lending and borrowing operations between the RBI and banks
Correct answer is option 'B'. Can you explain this answer?
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What is the primary purpose of the Market Stabilisation Scheme (MSS) ...
The Market Stabilisation Scheme (MSS), introduced by the RBI in 2004, primarily aims to absorb surplus liquidity arising from large capital inflows. This scheme involves the sale of short-dated government securities and treasury bills to soak up excess liquidity in the system. The mobilized cash is held in a separate government account with the Reserve Bank. By implementing the MSS, the RBI can effectively manage liquidity conditions in the market, especially during times of excess funds influx, ensuring stability and control over the monetary environment.
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What is the primary purpose of the Market Stabilisation Scheme (MSS) ...
Overview of the Market Stabilisation Scheme (MSS)
The Market Stabilisation Scheme (MSS) was introduced by the Reserve Bank of India (RBI) in 2004 to address the challenges posed by excessive liquidity in the financial system, particularly due to large capital inflows.
Primary Purpose
- The primary objective of the MSS is to absorb surplus liquidity that arises from significant capital inflows into the Indian economy. This helps in maintaining liquidity at optimal levels and stabilizes the financial system.
Mechanism of the MSS
- Under the MSS, the RBI issues government securities to absorb excess liquidity. This is a key mechanism to counterbalance the inflow of foreign funds that can lead to inflationary pressures.
Importance of Liquidity Management
- Effective liquidity management is crucial for:
- Controlling inflation: Excess liquidity can lead to increased spending, pushing up prices.
- Stabilizing interest rates: By absorbing liquidity, the RBI can influence short-term interest rates, helping to maintain economic stability.
Conclusion
- Overall, the MSS is a vital tool for the RBI to ensure that the capital inflows do not destabilize the economy, making option 'B' the correct answer. By absorbing surplus liquidity, the RBI aims to maintain balance in the financial markets and promote sustainable economic growth.
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What is the primary purpose of the Market Stabilisation Scheme (MSS) introduced by the RBI in 2004?a)To regulate the functioning of the call money marketb)To absorb surplus liquidity arising from large capital inflowsc)To manage interest rate signals in the marketd)To facilitate daily lending and borrowing operations between the RBI and banksCorrect answer is option 'B'. Can you explain this answer?
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