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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