MARKET STABILISATION SCHEME
SUBMISSION 3: FINAL REPORT
ON
AUGUST 27, 2007
BY
SHRUTI SUSAN GEORGE (0611047)
VIKRAM BALAN (0611201)
INDIAN INSTITUTE OF MANAGEMENT, BANGALORE
TERM 4: JUNE-SEPTEMBER 2007
TABLE OF CONTENTS
SERIAL NO.
TITLE
PAGE
1.
EXECUTIVE SUMMARY
3
2.
BACKGROUND OF FII INFLOWS IN INDIA
4
3.
OBJECTIVE OF THE STUDY
4
4.
NEED FOR AND METHOD OF STERILISATION
5
5.
THE BALANCE SHEET OF THE RBI
6
6.
GOVERNMENT DEBT AND CHANGES IN PARAMETERS
7
7.
LIQUIDITY ADJUSTMENT FACILITY
10
8.
TRENDS IN THE CRR, REPO-RATE AND MSS
12
9.
PROBLEMS OF LIQUIDITY OVERHANG
13
10.
CONCLUSIONS
16
11.
APPENDIX
19
12.
REFERENCES
38
2
EXECUTIVE SUMMARY
The Market Stabilisation Scheme (MSS) was introduced in April 2004 to provide the Reserve
Bank of India with an additional instrument of liquidity management and to relieve the
Liquidity Adjustment Facility (LAF) from the burden of sterilisation operations. The MSS is
an arrangement between the Government of India and the Reserve Bank to mop up the
excess liquidity generated on account of the accretion of the foreign exchange assets of the
Bank to neutralize the monetary impact of capital flows. Under the scheme, the Reserve
Bank issues treasury bills/dated Government securities by way of auctions and the cost of
sterilisation is borne by the Government. The money raised under the MSS is held by the
Government in a separate identifiable cash account maintained and operated by the Reserve
Bank, which would be appropriated only for the purpose of redemption and/or buyback of
issuances under MSS.
With credit growth in the economy now showing signs of moderation, the banking system is
flush with funds. Increased government spending and RBI intervention in the forex market
are also fuelling liquidity in the system. In such a situation, our study looks at determining
the effectiveness of the MSS in reining in the money supply in the economy vis-à-vis the
other instruments of monetary policy, viz. LAF (repo and reverse repo rates) and the cash
reserve ratio (CRR).
The methodology we have adopted for our study is an initial data collection of FII inflows,
M3 money supply in the economy and inflation rates right from 2004 to the present day. We
have tried to associate these with the outstandings under the Market Stabilisation Scheme
since its inception in April 2004. We have also studied the points where the ceiling of
issuance of MSS bonds has been modified, to understand the reasoning behind that. Further,
we have also looked at the trend in the CRR, repo rates and reverse repo rates in the same
period to compare their effectiveness as opposed to the MSS. Regression and trend analyses
have led us to the few conclusions and recommendations mentioned towards the end.
3
BACKGROUND ON FII INFLOWS IN INDIA
Foreign Institutional Investors have been allowed to invest in the Indian market since 1992.
The decision to open up the Indian financial market to FII portfolio flows at that point in
time was influenced by several factors such as the complete disarray in India’s external
finances in 1991 and a disorder in the country’s capital market. Aimed primarily at ensuring
non-debt creating capital inflows at a time of an extreme balance of payment crisis and at
developing and disciplining the nascent capital market, foreign investment funds were
welcomed to the country. FII inflows today are perceived to be major drivers of the stock
market in India, and sudden reversals of these flows could lead to instability in the domestic
capital market. FIIs can be best described as “fleeting money”, and such a volatile nature of
capital flows calls for measures for policy liberalisation and regulatory supervision. The
Market Stabilisation Scheme (MSS) which was introduced in April 2004 is one such measure
which provides the Reserve Bank of India an additional instrument of liquidity management.
OBJECTIVE OF THE STUDY
The basic objectives of the monetary policy of India are price stability and adequate credit
flow to productive sectors of the economy. With significant changes in the operating
environment, there is an increasing focus on the maintenance of financial stability in the
context of better linkages between various segments of the financial markets. The primary
tool of monetary policy is Open Market Operations, which entails management of the
quantity of money in circulation through the buying and selling of various credit
instruments, foreign currencies and commodities. The Market Stabilisation Scheme (MSS) is
one of the policy initiatives of the RBI in trying to control money supply in the economy.
With outsourcing having become a leading employment generator in India, the seemingly
endless inflow of dollars into the Indian economy has proved a major challenge to policy
makers. The RBI’s ability to resist the pressure of an appreciating rupee on account of this is
constrained by the stock of government securities it owns. The Market Stabilisation Scheme
(MSS) was launched with this objective of enhancing capacity to pursue the policy of reserve
accumulation without monetary expansion. Also, with increased FII inflows into the
4
country, the net domestic assets and net foreign assets held keep spiraling upwards, leading
to an increasing amount of money circulated in the economy. In order to curb the
inflationary pressures rising on account of this, the Reserve Bank initiated a process to
reduce its holdings of net domestic assets by selling bonds and taking away liquidity from the
market. This process is called “sterilisation” and forms the essence of the Market
Stabilisation Scheme. With this background, we lay down the basic objectives of our study:

To understand the various instances in which the RBI employed the MSS as a tool
to control the money supply.

To trace the reasons behind the hiking of the ceiling for the scheme and analyse
the MSS from a fiscal as well as monetary viewpoint.

To analyse the effectiveness of MSS vis-à-vis the other open market operations like
the Liquidity Adjustment Facility (LAF) used by the RBI, and the impact that it has
produced over the last 2 years since its implementation.

To analyse implementation of the MSS and suggest alternatives and modifications
to the present strategy of reducing liquidity.
NEED FOR AND METHOD OF STERILISATION
Say $1 billion comes into the system because some foreign investor wants to invest here.
This $1 billion is equivalent to around Rs 4,300 crore and this means that the monetary base
has increased by the same amount. An increase in monetary base of such magnitude can
trigger inflationary tendencies in the economy. These inflationary pressures would force the
Government to further raise interest rates in the economy, which would further attract more
capital inflows, resulting in a vicious circle.
Sterilisation works at this interface between
a) The inflow of capital in the economy
b) The increase in overall monetary base
The policy of sterilising the inflows is followed when there is a fear of inflation in the
domestic economy. The RBI, to neutralize this volatile inflow, issues bonds to suck the Rs
4,300 crore out of the system. In effect, the money supply remains unchanged. However,
while sterilisation may thwart inflationary pressures, it is a fairly expensive process since the
5
MSS is one form of government debt, and creates pressures on the RBI balance sheet due to
interest outflow on this debt.
Sterilisation is equivalent to two operations by the RBI: first, it purchases the gift with
money creation, and then it absorbs the newly created money through the sale of
government securities it owns. Sterilisation thus affects the composition of the RBI’s balance
sheet (i.e., it swaps its domestic assets in the form of government securities for foreign assets
of equal value). Government securities are liabilities of the government regardless of whether
they are held by RBI or others to whom RBI sells them. As such, in a consolidated balance
sheet of the government and RBI, liabilities are unaffected by the swap, and the asset side is
larger by the amount of the foreign gift. If the RBI did not sterilize its newly created money,
its non-interest bearing currency liabilities would go up by the value of foreign gift it buys. In
a consolidation, non-interest bearing liabilities and assets go up by the same amount.
THE BALANCE SHEET OF THE RBI
Most central banks act as managers of public debt for a commission. Central banks often
maintain a high ratio of net foreign assets to currency to ensure the wherewithal to meet any
domestic demand for foreign currency. These banks conduct monetary operations through a
mix of instruments, such as, open market operations (and occasionally, changes in reserve
requirements and standing facilities), which adjust the quantum of primary liquidity and
changes in policy rates, which impact the price of base money. There now appears to be an
emerging consensus that central bank reserves act as a cushion in the sense that wellcapitalised central banks are relatively more credible in a market economy because they can
bear larger quasi-fiscal costs of market stabilisation, especially in case of large fiscal deficits.
Changes in reserve requirements alter the composition and profitability of the Reserve Bank
Balance Sheet (and reserve money) as well as bank liquidity. A change in the cash reserve
ratio (CRR) alters the ratio of currency and reserves on the liability side. The impact on the
asset side depends on the particular monetary environment. For example, if the CRR is
raised to sterilise the impact of capital inflows, there would be a shift in favour of foreign
assets. Second, if the CRR is raised in order to tighten monetary conditions to stem capital
outflows, the market liquidity gap generated by the mix of higher reserve requirements and
6
drawdown of foreign currency assets is likely to be funded by an increase in domestic assets
either through reverse repos or higher recourse to standing facilities. Finally, a reduction in
the CRR is almost always associated with a reduction in domestic assets as banks either
invest the release of resources in repos or redeem standing facilities. The payout in the form
of CRR balances is a charge on income.
GOVERNMENT DEBT AND CHANGES IN PARAMETERS
The following data have been obtained from the debt position of the Government of India,
and show the internal and external debt of the government. As mentioned earlier, the
liabilities under the Market Stabilisation Scheme are included as a separate entry in the
balance sheet, and the same is shown under:
Figure 1: Debt position of the Government of India
Using the above, we have plotted a variation of the government debt versus time, and
compared it with the variation of debt due to MSS versus time. From this graph, we can see
that the fiscal debt accrued through MSS has grown at a faster rate and has faced larger
volatility than the net fiscal debt. While the net fiscal debt increased by 14.5% over the
financial year 2005-06 to 2006-07, the debt due to MSS issuances increased by 150%. But the
7
trend to be observed is that the MSS is now being decreasingly used as an instrument to
absorb liquidity as can be seen from the next graph, where the LAF outstanding and the
MSS outstanding are plotted against time.
Government Debt
3000000
20000
2500000
40000
2000000
60000
1500000
80000
1000000
100000
120000
500000
0
0
31st March 2003
31st March 2004
Debt due to MSS
31st March 2005
31st March 2006
31st March 2007
Overall internal debt
Figure 2: Overall and MSS debt over time
The Reserve Bank cannot pay interest on Government balances or on bank balances, in
excess of CRR stipulations. Since the Government cannot receive interest on surplus
balances with the Reserve Bank, it typically “buys back” Government paper from the central
bank (up to Rs.10,000 crore) for the period of surplus and saves the interest payment. This
means if capital flows do not follow the seasonality of the Government expenditure and the
Centre runs a surplus, the Reserve Bank needs to have a sufficient stock of Government
paper to transfer to the Government. This is how the Market Stabilisation Scheme (MSS)
was recommended.
8
The Government issues paper to mop up liquidity generated by capital flows and parks the
proceeds with the Reserve Bank. The monetary impact of the accretion to the Reserve
Bank’s foreign assets, arising out of the absorption of surplus capital flows is thus nullified
by the decline in the Reserve Bank’s net credit to the Centre, because of the accretion to the
Centre’s cash balances with the Reserve Bank. Although it is money-neutral, the MSS
enlarges the Reserve Bank Balance Sheet because the proceeds are immobilised in a separate
identified account within the head of the Centre’s balances with the Reserve Bank, unlike in
the case of traditional open market operations which is balance sheet-neutral. While the
impact of the MSS on the Reserve Bank’s surplus is limited in terms of income, the central
bank’s rate of surplus declines because the consequent increase in the size of the balance
sheet requires higher allocations to be made in terms of Contingency Reserves.
Historically, the CRR hikes have been far more successful in driving increases in borrowing
and lending rates by banks than increases in signal rates like the repo rate. The cost of using
the CRR versus the cost of market instruments like the MSS bonds is also an issue. While on
the MSS bonds, the government has to bear an interest charge of anywhere between 7.5 and
8 per cent, depending on the tenor, the RBI shells out a meager 0.5 – 1% on CRR balances.
As a result, The RBI now has increasingly started using CRR as a tool to sterilize liquidity
from the market. Use of CRR has two advantages to the RBI:

It sends out a strong signal that the Central Bank intends to pursue a tight monetary
policy and second sterilisation cost through CRR is almost negligible compared to
the other instruments. Current effective interest rate paid on CRR balances stands at
1% (reduced to 0.5% from FY08), while the interest paid on a LAF operations is 6%
(no change in rates in the latest announcement) and around 7.5-8% on the MSS
bonds depending on tenure whether it is a treasury bill or dated security. This way
the government is saving around 5.5-7% on the cost of liquidity sterilisation.

CRR hike compresses Net interest Margin (NIM) further adding to RBI’s objective.
9
LIQUIDITY ADJUSTMENT FACILITY
Another open market operation that the RBI undertakes to constrain liquidity is the
Liquidity Adjustment Facility (LAF). The LAF is a tool used in monetary policy that allows
banks to borrow money through repurchase agreements. This arrangement allows banks to
respond to liquidity pressures and is used by governments again to assure basic stability in
the financial markets. Liquidity adjustment facilities are used to aid banks in resolving any
short-term cash shortages during periods of economic instability or from any other form
of stress caused by forces beyond their control. Various banks will use eligible securities as
collateral through a repo agreement and will use the funds to alleviate their short-term
requirements, thus remaining stable.
Repo rate is the rate at which the central bank lends money to the other banks. The reverse
repo rate is the rate at which the other banks park their excess funds with the central bank.
The reverse repo rate is always lower than the repo rate and is generally equal to the lending
rate between banks (excluding the central bank). The word repo represents the collateral that
is given by banks to the central bank for borrowing money. On repayment of the borrowing
the banks repossess their collateral given to the central bank, hence the word repo rate. An
increase in the repo rate reduces the money supply in the system whereas a decrease in the
repo rate infuses money into the system. An official hike in fixed reverse repo rate signals
that the RBI wants to tighten liquidity in the market believing that it will help in controlling
the expected inflation.
The monetary management of the sustained capital flows since November 2000 poses a
challenge, especially as the Reserve Bank is beginning to run out of government paper for
countervailing open market operations. The choice between the three standard solutions,

Raising reserve requirements

Issuing central bank securities

Conducting uncollateralised repo operations, (assuming the central bank is credible enough)
is often critical, especially as the degree of market orientation and the associated incidence of
the deadweight loss of sterilisation on the monetary authority and the banking system varies
a great deal. An intermediate solution between central bank bills (which concentrate the cost
10
on the former) and reserve requirements (which impose a tax on the latter) is to conduct a
continuum of relatively short-term uncollateralised repo operations. While the Market
Stabilisation Scheme provides the Reserve Bank the headroom for maneuver, the proposal
of the Reserve Bank's Internal Group on Liquidity Adjustment Facility to amend the
Reserve Bank of India Act, 1934 in order to enable the institution of a standing deposit-type
facility merits attention.
Few experts believe that the RBI should not use CRR as an instrument of sterilisation. Open
market operations/MSS should be used instead. They are of the opinion that when the CRR
is raised, banks have to go out and borrow more, usually by way of high-cost deposits; or sell
off any holdings of government bonds in excess of the statutory liquidity ratio (SLR)
requirement; or, call in loans. No one expects banks to call in loans. Efficient banks, unlike
“lazy banks”, do not have surplus holdings of government bonds, and are thus forced to
take high-cost deposits. This has to be done whenever the central bank hikes CRR. In
contrast, open market operations through the MSS allow the RBI to sterilise its intervention
as and when it occurs. Buying government bonds beyond the SLR limit is optional, and
hence higher rates have to be offered to attract banks to buy them, which spells higher
interest rates overall. The net effect, however, is a more efficient and smooth system.
11
TRENDS IN THE CRR, REPO-RATE & MSS
MSS, CRR, Repo Rate vs Time
12000
12 %
10000
10 %
8000
8%
6000
6%
4000
4%
2000
2%
0%
0
FY 02
MSS
CRR
Repo rate
Reverse Repo
FY 06
Figure 4: Movements of the instruments of monetary policy with time
From this graph, we can see that the LAF interest rates (CRR, repo and reverse repo) are
being changed around once every quarter after a period from FY 2003 to FY 2005 when it
was kept constant and MSS was being used as a liquidity absorption instrument. . During the
fiscal year 2005-06, the total issuances of MSS bonds decreased from 87,500 crore rupees to
50,000 crore rupees and then increased in the next financial year to 96,000 crore rupees. (See
Appendix) Simultaneously, the RBI raised repo and reverse repo rates were raised around
200 basis points, with the spread increasing from 100 basis points to 175 basis points. The
RBI thus has been shifting its focus from exclusive use of the MSS (as in 2004-05) to using
all the instruments for reducing liquidity.
12
PROBLEMS OF LIQUIDITY OVERHANG
Liquidity overhang is the excess funds in the system that is not being used for consumption
or investment purposes. It is idling money. Inflation control is often cited as a reason for
creating liquidity. It is argued that releasing large sums of money into the economy would
immediately drive prices up. The financial reality of reducing the liquidity overhang is quite
different. Releasing such large sums of money into the economy as investments can raise
productivity. Investment in the latest knowledge-embodied technologies is only going to
raise efficiency and lower real costs. However, the Indian economy still does not seem to be
producing development schemes worthy of funding at the rates at which the liquidity in the
economy is going up.
Some of the sources of liquidity in the economy are:

The Liquidity Adjustment Facility (LAF)

The Market Stabilisation Scheme (MSS)

Surplus funds with the Life Insurance Corporation of India

Excess funds with commercial banks
13
Figure 5: LAF and MSS outstanding values from 2004 to 2007
14
The graphs of LAF and MSS below show that the RBI is balancing the outstanding LAF
bonds and MSS bonds outstanding issued by a mix of changes in repo and reverse repo rates
and actively selling bonds. From the financial year 2006-07, the outstanding LAF debts have
been negative. The RBI is thus a net creditor of the external banks and has pumped liquidity
into the system. This has been counterbalanced by increasing amounts of MSS issuances.
LAF & MSS Outstanding
100000
80000
60000
40000
20000
0
-20000
-40000
FY04
FY05
FY06
LAF
FY07
MSS
Figure 3: LAF and MSS outstanding over a period of time
Thus, while the MSS provided another tool for liquidity management, it was designed in
such a manner that it did not have any fiscal impact except to the extent of interest payment
on the outstanding amount under the MSS. The amount absorbed under the MSS, which
had reached Rs.78,906 crore on September 2, 2005, declined to about Rs.32,000 crore in
February 2006 due to unwinding of nearly Rs.47,000 crore in view of overall marginal
liquidity which has transited from the surplus to the deficit mode. As part of unwinding,
fresh issuances under the MSS were suspended between November 2005 and April 2006. In
several subsequent auctions during 2006-07, only partial amounts were accepted under the
MSS. Subsequently, the amount absorbed under the MSS increased again to Rs.62,974 crore
in March 2007. The MSS has, thus, provided the Reserve Bank the necessary flexibility to
15
not only absorb liquidity but also to ease liquidity through its unwinding, if necessary. With
the introduction of the MSS, the pressure of sterilisation on LAF has declined considerably
and LAF operations have been able to fine-tune liquidity on a daily basis more effectively.
Thus, the MSS empowered the Reserve Bank to undertake liquidity absorptions on a more
enduring but still temporary basis and succeeded in restoring LAF to its intended function of
daily liquidity management.
CONCLUSIONS
The Appendix shows that FII inflows into the country, over the last few years, grew
tremendously from a meager Rs. 2900 crore to Rs. 48,335 crore. This necessitated the setting
up of additional instruments for control of money supply in the economy, and hence we see
that the Market Stabilisation Scheme was setup as a policy tool since April 2004.
We can see that the average quarterly inflation rate has reached a high of 7.8% in the months
of July-August 2004, and in the same period we see a big jump in the rate of FII inflows,
which is quite an expected sign. Again, in the 4th quarter of 2005-06, the inflation reached a
low of 4.0%, and quite obviously, curbing price rise would not have been high on the agenda
of the RBI. As a result, we see that even though the FII inflows went up from Rs. 6696 crore
to Rs. 16089 crore, the bonds issued under the Market Stabilisation Scheme were zero.
However, this led to inflation shooting up to 4.7% by the next quarter.
We can see that the outstanding under MSS has been going up ever since its issuance in
April 2004, that is, from Rs. 14296 crore to the present-day value of Rs. 98970 crore.
Further, the yields on the 91-day and 364-day bonds issued under the MSS have also gone
up from around 4.3-4.4% in April 2004-05 to the present-day value of 7.4-7.6%. Hence we
can conclude that the public debt of the Government of India has gone up tremendously on
account of MSS alone. The result of the above is the mounting pressure on the fiscal debt
for the government.
16
The Appendix also gives us the trend in the M3 money supply in the country, and shows the
increase in every quarter and every year. From the details, we can clearly see that liquidity in
the system has been going up by huge proportions every year. Also, from 2005-06 to 200607, it is evident that even though the bonds issued under the MSS were increased from a
value of Rs. 50000 crore to Rs. 96000 crore, the increase in liquidity in the system has been
Rs. 567,372 crore as opposed to Rs. 458,456 crore the previous year.
There was a release of net liquidity of the order of Rs.5500 crore in the second half of
November 2005 through MSS redemptions as the Reserve Bank refrained from fresh
auctions under the scheme in the second half of the month. During this period, the liquidity
in the system had tightened and fresh issuances of MSS bonds were suspended. The reverse
repo rate then was increased from 5.00% to 5.25% and then 5.50% and it was accompanied
by a simultaneous redemption of MSS bonds to inject liquidity into the system. Infact this
period witnessed massive redemption of MSS bonds thereby reducing the total MSS
outstanding from Rs. 70000 crore in the 2nd quarter of 2005-06 to about Rs. 30000 crore by
the end of that financial year.
The correlation between M3 money supply, FII inflows in the debt and equity markets and
inflation to the CRR, MSS issuances, repo rates and reverse repo rates were found with the
help of SPSS. From the different lags applied to the dependent variable (1-3 months and 1-3
quarters), it was found that M3 money supply showed the most significant correlation to
repo rates and reverse repo rates at no lag, and to CRR at one quarter lag. Similarly, inflation
showed a positive correlation at 2-quarters’ lag to reverse repo rates. MSS did not show
significant correlation to any dependent variable using quarterly data. Using monthly data, it
was seen that MSS showed a positive correlation with inflation, which is contrary to what
should be seen. This implies that MSS shows a short term positive effect on liquidity and
must be examined in greater details for anomalies. Regressions were carried out using
quarterly data and it was seen that none of the variables was able to satisfactorily explain the
changes in M3 money supply quarterly. No significant variables were thus identified.
From the Appendices, we can see a clear trend wherein the M3 broad money supply in the
economy and the interest rate instruments (CRR, repo rate and reverse repo rates) show a
17
positive correlation. This tells us that with an increase in the M3 money supply, the
government resorts to an increase in one or all of these 3 instruments to suppress the
liquidity. However, a relation between the application of these instruments including the
Market Stabilisation Scheme and inflation rates in the economy is not evident. This could be
probably because a lot more factors work towards influencing inflation rates in the economy
– exchange rates, currency markets, etc. An assumption we state here is that of causality, by
which we say that the correlations talk about the application of the monetary policy
instruments as dependents on the broad money supply (M3), while the inflation rates are a
dependent on these instruments.
18
APPENDIX
[1] Regression with lag:
b
Va riables Entere d/Re moved
Model
1
Variables
Entered
Repo,
a
MSS, CRR
Variables
Removed
.
Method
Enter
a. All reques ted variables ent ered.
b. Dependent Variable: M3
Model Summary
Model
1
R
.718a
R Square
.516
Adjusted
R Square
.355
Std. Error of
the Estimate
54532.08016
a. Predictors: (Constant), Repo, MSS, CRR
ANOVAb
Model
1
Regres sion
Residual
Total
Sum of
Squares
2.9E+010
2.7E+010
5.5E+010
df
3
9
12
Mean Square
9519712885
2973747767
F
3.201
Sig.
.076a
a. Predic tors: (Constant), Repo, MSS, CRR
b. Dependent Variable: M3
Coefficientsa
Model
1
(Constant)
MSS
CRR
Repo
Unstandardized
Coefficients
B
Std. Error
-238611
178090.3
-3.742
2.113
-37578.9 57309.890
93134.267 42191.858
Standardized
Coefficients
Beta
-.432
-.256
.879
t
-1.340
-1.771
-.656
2.207
Sig.
.213
.110
.528
.055
a. Dependent Variable: M3
19
[2] Regression with 1-Q lag:
b
Va riables Entere d/Re moved
Model
1
Variables
Entered
Repo,
a
MSS, CRR
Variables
Removed
.
Method
Enter
a. All reques ted variables ent ered.
b. Dependent Variable: M3
Model Summary
Model
1
R
.653a
R Square
.426
Adjusted
R Square
.211
Std. Error of
the Estimate
62815.65393
a. Predictors: (Constant), Repo, MSS, CRR
ANOVAb
Model
1
Regres sion
Residual
Total
Sum of
Squares
2.3E+010
3.2E+010
5.5E+010
df
3
8
11
Mean Square
7811312463
3945806379
F
1.980
Sig.
.196a
a. Predic tors: (Constant), Repo, MSS, CRR
b. Dependent Variable: M3
20
[3] Regression with 2-Q lag:
Variables Entered/Removedb
Model
1
Variables
Entered
Variables
Removed
RRepo,
MSS, aCRR,
Repo
Method
.
Enter
a. All requested variables entered.
b. Dependent Variable: M3
Model Summary
Model
1
R
.777a
R Square
.604
Adjusted
R Square
.340
Std. Error of
the Estimate
47732.69146
a. Predictors: (Constant), RRepo, MSS, CRR, Repo
ANOVAb
Model
1
Regres sion
Residual
Total
Sum of
Squares
2.1E+010
1.4E+010
3.5E+010
df
4
6
10
Mean Square
5208132860
2278409834
F
2.286
Sig.
.175a
a. Predic tors: (Constant), RRepo, MSS, CRR, Repo
b. Dependent Variable: M3
Coefficientsa
Model
1
(Constant)
MSS
CRR
Repo
RRepo
Unstandardized
Coefficients
B
Std. Error
-327494
211440.7
3.136
1.983
21864.191 62472.424
-108246 98639.426
177801.8 99192.370
Standardized
Coefficients
Beta
.449
.163
-1.208
1.554
t
-1.549
1.581
.350
-1.097
1.792
Sig.
.172
.165
.738
.315
.123
a. Dependent Variable: M3
21
[4] Correlations without lag:
Descriptive Statistics
Inflation
M3
FII
MSS
CRR
Repo
RRepo
Mean
5.4177
107111.8
9916.3800
19461.54
5.0192
6.5192
5.2885
Std. Deviation
1.07979
67898.74112
7708.65848
7843.41958
.46167
.64114
.58493
N
13
13
13
13
13
13
13
Correlations
Inflation
M3
FII
MSS
CRR
Repo
RRepo
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Inflation
1
13
-.200
.256
13
-.028
.464
13
.550*
.026
13
-.346
.123
13
-.060
.423
13
-.340
.128
13
M3
-.200
.256
13
1
13
.199
.257
13
-.254
.201
13
.430
.071
13
.587*
.017
13
.626*
.011
13
FII
-.028
.464
13
.199
.257
13
1
13
-.273
.183
13
.300
.160
13
.213
.243
13
.178
.281
13
MSS
.550*
.026
13
-.254
.201
13
-.273
.183
13
1
13
.023
.470
13
.209
.246
13
.062
.421
13
CRR
-.346
.123
13
.430
.071
13
.300
.160
13
.023
.470
13
1
13
.790**
.001
13
.711**
.003
13
Repo
-.060
.423
13
.587*
.017
13
.213
.243
13
.209
.246
13
.790**
.001
13
1
13
.914**
.000
13
RRepo
-.340
.128
13
.626*
.011
13
.178
.281
13
.062
.421
13
.711**
.003
13
.914**
.000
13
1
13
*. Correlation is significant at the 0.05 level (1-tailed).
**. Correlation is significant at the 0.01 level (1-tailed).
22
[5] Correlations with 1-Q lag:
Descriptive Statistics
Inflation
M3
FII
MSS
CRR
Repo
RRepo
Mean
5.4358
105674.0
9146.5700
19083.33
5.0625
6.5625
5.3542
Std. Deviation
1.12573
70710.92780
7511.41088
8067.42421
.45383
.64952
.55859
N
12
12
12
12
12
12
12
Correlations
Inflation
M3
FII
MSS
CRR
Repo
RRepo
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Inflation
1
12
-.196
.270
12
-.006
.492
12
.350
.133
12
-.079
.404
12
-.122
.352
12
-.403
.097
12
M3
-.196
.270
12
1
12
.184
.283
12
.093
.387
12
.639*
.013
12
.579*
.024
12
.541*
.035
12
FII
-.006
.492
12
.184
.283
12
1
12
.066
.419
12
.150
.321
12
-.084
.398
12
-.056
.431
12
MSS
.350
.133
12
.093
.387
12
.066
.419
12
1
12
.088
.392
12
.263
.204
12
.147
.325
12
CRR
-.079
.404
12
.639*
.013
12
.150
.321
12
.088
.392
12
1
12
.776**
.002
12
.667**
.009
12
Repo
-.122
.352
12
.579*
.024
12
-.084
.398
12
.263
.204
12
.776**
.002
12
1
12
.920**
.000
12
RRepo
-.403
.097
12
.541*
.035
12
-.056
.431
12
.147
.325
12
.667**
.009
12
.920**
.000
12
1
12
*. Correlation is significant at the 0.05 level (1-tailed).
**. Correlation is significant at the 0.01 level (1-tailed).
23
[6] Correlations with 2-Q lag:
Descriptive Statistics
Inflation
M3
FII
MSS
CRR
Repo
RRepo
Mean
5.3745
93212.73
9214.3782
18818.18
5.1136
6.6136
5.4318
Std. Deviation
1.15949
58739.24620
7874.18122
8406.16657
.43823
.65540
.51346
N
11
11
11
11
11
11
11
Correlations
Inflation
M3
FII
MSS
CRR
Repo
RRepo
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Inflation
1
11
-.400
.111
11
.000
.500
11
.324
.166
11
.020
.477
11
-.405
.108
11
-.648*
.015
11
M3
-.400
.111
11
1
11
.257
.223
11
.460
.077
11
.238
.241
11
.508
.055
11
.625*
.020
11
FII
.000
.500
11
.257
.223
11
1
11
-.070
.419
11
.230
.248
11
-.044
.449
11
.040
.453
11
MSS
.324
.166
11
.460
.077
11
-.070
.419
11
1
11
.145
.335
11
.308
.178
11
.231
.247
11
CRR
.020
.477
11
.238
.241
11
.230
.248
11
.145
.335
11
1
11
.756**
.004
11
.593*
.027
11
Repo
-.405
.108
11
.508
.055
11
-.044
.449
11
.308
.178
11
.756**
.004
11
1
11
.935**
.000
11
RRepo
-.648*
.015
11
.625*
.020
11
.040
.453
11
.231
.247
11
.593*
.027
11
.935**
.000
11
1
11
*. Correlation is significant at the 0.05 level (1-tailed).
**. Correlation is significant at the 0.01 level (1-tailed).
24
[7] Regression:
Variables Entered/Removedb
Model
1
Variables
Entered
Variables
Removed
RRepo,
MSS, aCRR,
Repo
Method
.
Enter
a. All requested variables entered.
b. Dependent Variable: M3
Model Summary
Model
1
R
.720a
R Square
.519
Adjusted
R Square
.134
Std. Error of
the Estimate
57333.95411
a. Predictors: (Constant), RRepo, MSS, CRR, Repo
ANOVAb
Model
1
Regres sion
Residual
Total
Sum of
Squares
1.8E+010
1.6E+010
3.4E+010
df
4
5
9
Mean Square
4432355755
3287182294
F
1.348
Sig.
.369a
t
Sig.
.560
.609
.209
.221
.376
a. Predic tors: (Constant), RRepo, MSS, CRR, Repo
b. Dependent Variable: M3
Coefficientsa
Model
1
(Constant)
MSS
CRR
Repo
RRepo
Unstandardized
Coefficients
B
Std. Error
284130.5
455219.4
-1.391
2.549
-175763
121996.9
272419.7
194795.1
-195479
201246.4
Standardized
Coefficients
Beta
-.200
-1.167
2.904
-1.542
.624
-.546
-1.441
1.398
-.971
a. Dependent Variable: M3
25
[8] Correlations 3-Q lag:
Descriptive Statistics
Inflation
M3
FII
MSS
CRR
Repo
RRepo
Mean
5.3360
91460.70
9161.1600
18950.00
5.1750
6.6750
5.5000
Std. Deviation
1.21475
61612.89051
8298.03028
8848.88568
.40910
.65670
.48591
N
10
10
10
10
10
10
10
Correlations
Inflation
M3
FII
MSS
CRR
Repo
RRepo
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Pearson Correlation
Sig. (1-tailed)
N
Inflation
1
10
-.416
.116
10
-.003
.497
10
-.031
.466
10
-.112
.379
10
-.648*
.021
10
-.759**
.005
10
M3
-.416
.116
10
1
10
.256
.237
10
.175
.314
10
.161
.329
10
.552*
.049
10
.558*
.047
10
FII
-.003
.497
10
.256
.237
10
1
10
-.240
.252
10
-.033
.464
10
-.098
.394
10
-.018
.480
10
MSS
-.031
.466
10
.175
.314
10
-.240
.252
10
1
10
.137
.353
10
.308
.194
10
.233
.259
10
CRR
-.112
.379
10
.161
.329
10
-.033
.464
10
.137
.353
10
1
10
.726**
.009
10
.489
.076
10
Repo
-.648*
.021
10
.552*
.049
10
-.098
.394
10
.308
.194
10
.726**
.009
10
1
10
.936**
.000
10
RRepo
-.759**
.005
10
.558*
.047
10
-.018
.480
10
.233
.259
10
.489
.076
10
.936**
.000
10
1
10
*. Correlation is significant at the 0.05 level (1-tailed).
**. Correlation is significant at the 0.01 level (1-tailed).
[6] Basic data
[7] 91-day bond issuance under MSS
[8] 364-day bond issuance under MSS
26
REFERENCES
[1] Reserve Bank of India. Report on Currency and Finance 2003-04, 2004-05, 2005-06
[2] Reserve Bank of India. Annual Policy Statement for the year 2004-05, 2005-06, 2006-07
[3] Debt Position of the Government of India, Government Receipts Budget 2004-07.
[4] Kumar, Saji. FIIs vs Sensex – An Emerging Paradigm, 2006.
[5] http://www.rbi.org.in
[6] http://www.epw.org.in
[7] http://www.econstats.com
[8] http://www.indiastat.com
[9] http://indiabudget.nic.in
27