Under RBI’s Market Stabilisation Scheme (MSS), the RBI issues Market Stabilisation Bonds (MSBs)to withdraw the excess liquidity in the economy. These bonds are government bonds provided by the central government to the RBI for the dedicated purpose of withdrawing excess liquidity under the MSS. The value of bonds in rupees will be treated as net RBI debt to the government. This is because the proceeds from MSS will not go to the government, though it is the government who provided the bonds.
The proceeds from the Market Stabilization Scheme are held in a separate identifiable cash account by the government. The fund is appropriated only for the redemption of the treasury bills or dated securities issued under the MSS. In the usual case, T-bills or dated securities of the government are used to cover the fiscal deficit of the government. But in the case of the MSS, the proceeds cannot be used by the government. The securities issued under the MSS represent net RBI liabilities with the government and is a part of public debt. The undesirable aspect of the MSS exercise is that the interest paid out on MSS bonds shall be beard by the government and is accounted in the budget. The interest payments for MSS securities represent the budgetary burden for ensuring price stability. This interest payment is often referred as carrying cost of sterilisation.
