MUMBAI: The Reserve Bank of India (RBI) special money market operation to provide money to mutual funds has found few takers as a series of liquidity inducing measures has eased the cash crunch in the financial system, industry experts said.
While the RBI has offered to provide liquidity up to 200 billion rupees to mutual funds, borrowing under this special facility in the last five auctions since it was introduced stands at a mere 85.50 billion rupees. Improvement in liquidity conditions meant that funds are able to manage their redemptions by selling assets, said A.P. Kurian, chairman of Association of Mutual Funds. "Borrowing (from the RBI via banks) is only a fall-back procedure," he added. "It is not that 200 billion rupees is available and you go and borrow." The RBI this month cut the cash reserve ratio twice by a total 250 basis points, releasing 1 trillion rupees since Oct. 11, while the federal government pledged to release another 250 billion rupees to compensate banks for farm loan waivers. The Reserve Bank of India followed up these liquidity -enhancing measures with a surprise cut in the repo rate by 100 basis points to 8 percent on Monday. Under the Reserve Bank's special repo auction for funds, banks can borrow up to 200 billion rupees. Funds, in turn, can borrow this money by swapping their large but illiquid holdings of bank debt in exchange for cash. Overnight cash rates have fallen to around 5 percent from levels of 23 percent seen earlier this month and the RBI absorbed 276 billion rupees at its daily money market operations on Monday, its highest since early June. Rajiv Anand, head of fixed-income at Standard Chartered Mutual Fund who manages about 110 billion rupees ($2.1 billion) said improved liquidity in the money markets meant investors buying short-term money market paper and funds were able to sell them at reasonable prices to generate liquidity. 'VOTE OF CONFIDENCE' Outstanding certificates of deposit (CD's), a short-term money market instrument issued by banks, stood at 1.78 trillion rupees in mid- September, up roughly 50 percent from January, RBI data shows. Liquid funds held a little more than 50 percent of their portfolios in such paper at end-September as they offered attractive rates of interest, data from ICRA Online showed. These funds also saw outflows of 196.75 billion rupees in September as compared 43.24 billion rupees in the previous month. "The very fact that funds are not using the central bank's special repo is a huge vote of confidence that they are not facing any liquidity problems," Standard Chartered's Anand said. But some fund managers said lack of clarity on liquidity conditions in the near-term and reluctance of banks to lend to mutual funds amid strong corporate demand for bank loans suggests liquidity concerns remain. "Giving money to a mutual fund against CD's amounts to a credit exposure and why should I do so if I can lend the same funds to a corporate at a higher rate of interest," said a strategist at a foreign bank. N.Sukumar Research Analyst www.kences1.blogspot.com --~--~---------~--~----~------------~-------~--~----~ You received this message because you are subscribed to the Google Groups "Kences1" group. To post to this group, send email to [email protected] To unsubscribe from this group, send email to [EMAIL PROTECTED] For more options, visit this group at http://groups.google.com/group/kences1?hl=en -~----------~----~----~----~------~----~------~--~---
