Rakesh Mohan, former deputy governor of Reserve Bank of India (RBI) on Wednesday said Market Stabilisation Scheme (MSS) bonds should be part of the standard macro management toolkit.

"I think that this should be on the table as and when necessary. They don't need to be issued all the time, but I think it should be part of the standard macro management toolkit. This was invented by 2004-2005 from a committee chaired by Usha Thorat. This was one of the real innovations the RBI did and this is an absolutely justifiable recommendation that this report has made on reissuance of MSS," he said in an interview to CNBC-TV18.

However, Mohan said he was surprised by RBI's recommendation on issuance of RBI securities, "I think it is a bad idea. The Usha Thorat report examined this issue very carefully and came to a conclusion that issuing parallel RBI securities to government securities was not a good idea for two reasons. One that there would be confusion in the market between the sovereign bond and the central bank bond. Second, it really places high liability to RBI and puts some potential danger to its balancesheet."

According to Mohan, RBI has given a great deal of justification for maintaining the inflation targeting framework, "The maintenance of the inflation target, in some sense the report provides a great deal of justification for keeping the target at 4 percent and it has provided certain amount of research suggesting that 6 percent is sort of a threshold inflation limit which then starts impacting growth negatively. Therefore, the justification for keeping plus 2 and minus 2. So, within that context it seems to me that the maintenance of the target is okay."

Mohan said he fails to understand why the current Monetary Policy Committee (MPC) was not given the powers to take a call on the reverse repo rate.

"I never understood why this wasn't the case with the current MPC, in the sense that if you have an interest rate corridor through the liquidity adjustment facility or LAF, it means that the weight average call rate which they do talk about as the operating target, would obviously move from repo to reverse repo rate when there is shortage of liquidity and excess liquidity. So, clearly when there is shortage of liquidity and the RBI is essentially doing repo operations, then the repo rate is the operating rate. On the other hand, either because of excess capital flows or because of quantitative easing (QE) when you have excess liquidity in the system, then the reverse repo rate becomes the operating rate and which is logical if you have a LAF into its corridor. So, there has got to be a part of the MPC mandate," he said.

For full interview, watch the video.

(Edited by : Jomy Pullokaran)