Ever wondered what is Market Stabilisation Scheme?

In 2002-4 the Rupee started strengthening. This was because of the amount of foreign currency that came into India for being invested. This put a lot of pressure on the Rupee – and the strengthening hurt the exporters (remember the great software industry which did not tell you that it was profitable because the Rupee was weakening, now started crying when the Rupee was strengthening, shame shame Infosys!!).

So RBI had to buy the dollars an print an equivalent Indian currency.

This was pulled out of the system by bonds, floated under the MSS. These bonds helped the government in its borrowing program and helped the bank generate liquidity for the purpose. Banks buy these bonds if the interest rates are attractive, if they think interest rates will go up in the future, then they will not buy these bonds.

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  1. Hi Subra,

    Don’t you think this can be term as fraud with those Indians who don’t understand this Juggling by RBI of creating money out of thin air?

    Unfortunately I was ignorant for long time about this & fortunately now I understand this Juggling so I can take appropriate step to protect my self interest. I talk to many people about this thing when they surprise by inflation but they just remain ignorant.

  2. @Parag, all money is created out of thin air!!! Where else do you think all the money in the economy came from since Independence?!?
    What you are questioning is the legality of RBI in printing money against Dollar reserves as opposed to Govt Treasuries.

    Both modes of printing (against Govt Treasuries or against Dollar reserves) are highly inflationary. For the Govt Treasuries, RBI can rein in the inflation by selling the Gilts to Banks/institutions etc and reduce liquidity in the system. For Dollar reserves, they didn’t have anything equivalent and hence came up with this idea of MSBs (I would like to think of them as just another Bonds issued by RBI).

    Modern finance/economy works completely using smoke and mirrors. If every citizen became aware of the fraud underlying modern finance, then it would come to a total standstill and all gains of science/technology/co-operation will vanish into thin air!

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