MSS limit hiked
The ghost of excess liquidity has been haunting Dr. Reddy for some time now and speculations were ripe about RBI attempting to increase the CRR rate or even the Reverse repo rate but given the opposition that RBI would have had to face from the government, it decided to raise the MSS limit. (read report).
But is raising MSS limit going to take care of the problem of excess liquidity? Without incentives for financial institutions to lend for the long term, investing for short t-bills under the MSS seems unlikely and with falling premias, INR seems to hold it tight for some time in the future which will make the yields on bonds/bills, purchased by Banks under MSS, fall even further.
Though with oil bill not of much of a concern right now, RBI has little logic to raise CRR or any rate but liquidity is hitting the economy where it hurt most. With that reason, some of my friends in markets believe that it could be that the RBI is trying to exhaust its options by raising the MSS limit before it gets to announce the monetary review. If its actions before the review bear no fruits then Dr. Reddy can act bold and tinker with the CRR or the rates and will have a little less explaining to do to the Ministry of Finance.
Any which way, being the Governor of a Central Bank is no kids’ play. So while Dr. Reddy works on his grey cells, lets join him with a solemn song from my favorites on you tube…
