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| Understanding MSS (Market Stabilization
Scheme) and how it helps to control inflation |
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- When there is too much of liquidity of “money” in the
market, it can cause inflation. The Central Bank then
intervenes by releasing MSS bonds to control inflation.
- So what are MSS bonds and how do they help in
controlling inflation? MSS bonds control inflation by
sucking up the excess liquidity.
- For the uninitiated all this sounds like Greek and Latin.
Let's try and understand through a story.
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- Imagine the situation when summer holidays start. Its
fun times for the kids and they hardly stay at home.
From the start of the day till the end of the day they are
out playing, watching movies, going out with friends,
eating out, shopping etc. Only by the end of the day they
return to sleep and moreover when they are out of the
house they are spending their pocket money.
- Now imagine a city where thousands of kids have
invaded the streets, the restaurants, the movie halls, the
game parks, the shopping malls etc.
- Seeing this huge surge in demand, the
owners/management of malls, multiplexes, restaurants,
game parks raise their prices. This is quite natural as
price is directly proportional to demand.
- So there are too many kids in the market and hence
prices start to rise.
- In a sense these “kids' are like the excess liquidity in the
markets. Excess liquidity too causes prices to go up just
as excess kids cause prices to increase due to excess
demand for the same supply.
- Now let's imagine all the parents get together and
express their displeasure about their kids being out of
the house all the time.
- They start putting together plans that would make their
kids stay longer at home.
- They hit upon an idea!
- They print a large number of pamphlets in which they
write a message for all the kids.
- The message says, “ Kids if you agree to spend more time
at home we will lift all restrictions on watching
television, listening to music, reading books, eating
chocolates. You can also call your friends at home and
play any indoor games including video games.”
- Then they distribute these pamphlets in the market where the kids are having fun.
- When the kids read the message it pleases them. They
start thinking of home as a much better place as
compared to be out in the hot sun. They think of their
air-conditioned homes, the pampering that their parents
would do, the fun that they could have with friends at
home, the watching of TV and surfing of the internet
without any restrictions. The house with no restrictions
and lots of love is the home they now want to go to.
- All of a sudden the kids start moving into their homes
and start emptying the market. The mall owners, theatre
owners, restaurant owners and others are aghast at the
sight of the disappearing kids. They try their best and
coax them to stay on and spend in the market. They start
offering discounts and lower their prices as well.
- But the kids are not willing to stay back any more and
simply head for their homes.
- After the kids disappear the demand falls and the various
merchants have no option but to further drop prices so
that there is some off-take at least.
- Now in this example, the pamphlets that were printed by
the parents and released in the market are like the MSS
bonds that are released by the central banks and just like
the kids were sucked into their homes by the favorable
promises made in the pamphlets in the same way the
MSS bonds too suck up liquidity by making people
invest in these bonds due to favorable returns that are
promised in these bonds
- This is how MSS bonds are able to regulate liquidity in
the market / economy which leads to controlling the
prices of goods
and services and
brings down
inflation.
- I hope you can
now imagine the
concept of
controlling the
inflation by
releasing MSS
bonds.
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Hope this story succeeded in clarifying the concept of “Understanding MSS (Market Stabilization
Scheme) and how it helps to control inflation”
Please give us your feedback at
professor@tataamc.com
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