1. What are MSS bonds?

These are special bonds floated on behalf of the government by the RBI for the specific purpose of mop ping up the excess liquidity in the system when regular government bonds prove inadequate. These are mostly shorter-tenure bonds, of less than six months maturity . But the tenure differs depending on the requirement.

2. Why has the RBI chosen to issue MSS bonds now?

The sudden surge in deposits due to the surrender of demonetised currency notes in large quantities skews bond yields and interest rates, disrupting the functioning of the market. To impound the excess liquidity, bankers felt MSS bonds were a better option than a hike in CRR holdings. When the demonetisation of `500 and 1,000 notes led to a surge in deposits, he Reserve Bank of India asked banks to set aside all deposits received be tween September 16, 2016 and November 11, 2016 as cash reserve ratio or CRR. Later, the central bank decided to issue market stabilisation scheme (MSS) bonds to manage the excess liquidity.

3. How is it different from CRR?

CRR is perceived to be a blunt instrument with an immediate impact on liquidity, but it does not fetch any return for the depositing bank.

However, MSS bonds earn a return and qualify for statutory liquidity ratio, or SLR, that banks need to main tain in the form of short-tenured treasury bills and gov ernment bonds. MSS bonds, too, are raised through an auction and are tradable in the secondary market.

4. How are MSS bonds different from regular government bonds?

The regular government bonds are part of the government's borrowing programme and the interest payout on these has an impact on the fiscal position. The MSS bills and securities are matched by an equivalent cash balance held by the government with the Reserve Bank. Hence, they have only a marginal impact on the government's revenue and fiscal positions. The cost of such interest payment is shown separately in the Budget.

5. Has this instrument been used in the past?

The Reserve Bank first introduced MSS bonds in February 2004 when the country was flushed with dollar inflows, which needed to be converted into the rupee. This created huge surplus liquidity in the system and the RBI decided to impound it by issuing MSS bonds as the central bank was running out of stock of regular government bonds.