STERLISATION:
- Monetary action in which a central bank limits the effect of inflows and outflows of foreign capital on the money supply.
- It involves open market operations undertaken by RBI to neutralize the impact of associated foreign exchange operations.
DYNAMICS OF STERLISATION:
BOP should be zero in the accounts of RBI.
When FDI and FPI increases
↓
BOP becomes positive.
↓
+ BOP should be neutralized
↓
RBI purchased extra Dollar
↓
Injection of Rupee in the economy
↓
Inflation in the economy and depreciation of Rupee.
↓
RBI sell G-Sec to absorb liquidity
↓
Economy gets stabilized
This whole process that starts with influx of foreign currency to the stabilization of Rupee is referred to as sterilization.
Market Stabilization Scheme (MSS):
- Monetary management tool used by the Reserve Bank of India to suck out sudden excess liquidity from the market through issue of securities like Treasury Bills, Dated Securities etc. on behalf of the government.
- Surplus liquidity arising from sudden large capital inflows is absorbed through sale of temporary short-dated government securities and treasury bills. The money raised under MSS is kept in a separate account called MSS Account and not used by the government and hence it does not have any impact on Budget deficit.
- The interest cost is shown separately in the Budget and interest payment liability against this scheme is called carrying cost.
- MSS was used in 2004 for the first time in the wake of inflow of dollar in India. It was also invoked during the times of demonetization.
Gradation of different rates :
SDF<Reverse Repo< Repo < MSF (Bank Rate)
