Q. Consider the following statements regarding the Market Stabilization Scheme (MSS):
1. It is a tool used by commercial banks to reduce the liquidity and bringing the money market under control.
2. It was initiated by Raghuram Rajan after financial crisis of 2008.
Which of the statements given above is/are correct?

[A] 1 only

[B] 2 only

[C] Both 1 and 2

[D] Neither 1 nor 2

Answer: D
Notes:

Market Stabilisation Scheme or MSS is a tool used by the Reserve Bank of India to suck out excess liquidity from the market through issue of securities like Treasury Bills, Dated Securities etc. on behalf of the government.  

  • The money raised under MSS is kept in a separate account called MSS Account and not parked in the government account or utilized to fund its expenditures.  
  • The Reserve Bank under Governor YV Reddy initiated the MSS scheme in 2004, to control the surge of US dollars in the Indian market; RBI started buying US dollars while pumping in rupee.  
  • This eventually led to over-supply of the domestic currency raising inflationary expectations. MSS was introduced to mop up this excess liquidity. 

Source: TMH Ramesh Singh 

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