 "RBI opens window for MFs")
Mutual funds faced Rs 50,000-crore redemption orders from banks and companies on Tuesday, prompting the Reserve Bank of India (RBI) to provide them a three-day repo borrowing window at a 10.25 per cent interest rate.
The central bank had previously provided such access to special funding in 2008 when fund houses had faced redemption pressure of Rs 80,000 crore to Rs 1,00,000 crore over three-four days — about 20 per cent of the sector’s total assets of around Rs 5 lakh crore at that time. That was in the wake of a global financial crisis. Tuesday’s redemption, on the other hand, was a little over six per cent of fund houses’ total assets of Rs 8.11 lakh crore (as of June 2013).
The special window had a sobering effect on Wednesday, though fund houses remained edgy. The actual figures of redemption were not available but fund houses said there were some inflows, too, unlike Tuesday, when only heavy selling was seen. Sentiments improved after short-term interest rates cooled a little on Wednesday after surging the previous day. The rates of one-month certificates of deposit, which had jumped 150 basis points on Tuesday, came down to 10.4 per cent.
Tuesday’s surge in redemptions follows RBI’s liquidity-tightening measures, as banks and corporate entities usually park their short-term money with fund houses for better returns.
Industry sources said the Securities and Exchange Board of India (Sebi) and the Association of Mutual funds in India (Amfi), held a meeting on Tuesday and RBI was approached for opening the special window.
Reliance Mutual Fund CEO Sundeep Sikka said RBI’s special window was a welcome step, though the industry had been able to manage the redemptions so far. “We may or may not require this window,” he said. Some industry players, however, admitted fund managers were on back-to-back conference calls during the day to convince clients not to withdraw.
RBI calmed nerves further by allowing banks availing of the additional liquidity support through the repo window to seek waiver of penal interest for shortfall in maintenance of statutory liquidity ratio (up to 0.5 per cent of their net demand and time liability). Also, the waiver would be available to banks in addition to the two per cent waiver allowed under marginal standing facility.
Market players said there were redemptions in ultra-short-term, ultra, short-term and liquid funds, as they faced mark-to-market losses — a rare event. Over 70 per cent of the money of mutual funds is in debt schemes. As of June-end, liquid and money market funds held as much as Rs 1.62 lakh crore and income funds had assets of Rs 4.41 lakh crore. The total assets of the industry in June were Rs 8.11 lakh crore.
“After RBI decided to squeeze liquidity in the system by capping the liquidity adjustment facility at Rs 75,000 crore from Wednesday, companies feared they would be stuck for their liquidity requirement and rushed to withdraw from debt funds,” said an industry player.
According to industry experts, Rs 1-1.5 lakh crore are at stake from both corporate and banks in these schemes. And, if such withdrawals happen, these schemes will end up in losses, leading to more redemption pressure.
Net asset value (NAV) of most debt schemes declined more than two per cent — translating into an annualised negative return of over 500 per cent. “It was a rude shock for a lot of investors who thought liquid schemes never made losses,” said a fund manager.
However, a lot of mutual funds didn’t sell securities in the market and borrowed from the overnight market to meet the mismatch. Also, Amfi issued a late-evening circular, asking all fund houses to value their debt securities — even those below 60 days — at market prices. At present, only the debt securities with maturity above 60 days have to be valued at market price. Those below 60 days follow the amortisation method. Sources said Amfi asked fund houses to align the prices of their debt securities below 60 days to the CRISIL Bond Matrix, which is a gauge for weighted average prices.
On Tuesday, prices of the ten-year government securities had crashed by up to Rs 3.50 and yields on the 10-year benchmark had surged 54 basis points — the highest since January 2009. On Wednesday, the 10-year bond price rose 0.11 per cent and the yield fell 1.60 basis points.
“The situation is not as bad as in 2008, as investors have become more mature. But there have been a lot of queries,” said R Sivakumar, head of fixed income, Axis Mutual fund, admitting that he was on calls since 8.30 am on Tuesday morning.
According to him, the situation is different now, because Sebi has brought in tough guidelines. “In 2008, fund managers were allowed to invest in one-year papers in their short-term schemes. Now, they can invest only in papers of up to 91 days. Also, amortisation is allowed up to 60 days. So, the freedom with fund managers is much less,” he added.
The central bank had previously provided such access to special funding in 2008 when fund houses had faced redemption pressure of Rs 80,000 crore to Rs 1,00,000 crore over three-four days — about 20 per cent of the sector’s total assets of around Rs 5 lakh crore at that time. That was in the wake of a global financial crisis. Tuesday’s redemption, on the other hand, was a little over six per cent of fund houses’ total assets of Rs 8.11 lakh crore (as of June 2013).
The special window had a sobering effect on Wednesday, though fund houses remained edgy. The actual figures of redemption were not available but fund houses said there were some inflows, too, unlike Tuesday, when only heavy selling was seen. Sentiments improved after short-term interest rates cooled a little on Wednesday after surging the previous day. The rates of one-month certificates of deposit, which had jumped 150 basis points on Tuesday, came down to 10.4 per cent.
Tuesday’s surge in redemptions follows RBI’s liquidity-tightening measures, as banks and corporate entities usually park their short-term money with fund houses for better returns.
Industry sources said the Securities and Exchange Board of India (Sebi) and the Association of Mutual funds in India (Amfi), held a meeting on Tuesday and RBI was approached for opening the special window.
Reliance Mutual Fund CEO Sundeep Sikka said RBI’s special window was a welcome step, though the industry had been able to manage the redemptions so far. “We may or may not require this window,” he said. Some industry players, however, admitted fund managers were on back-to-back conference calls during the day to convince clients not to withdraw.
RBI calmed nerves further by allowing banks availing of the additional liquidity support through the repo window to seek waiver of penal interest for shortfall in maintenance of statutory liquidity ratio (up to 0.5 per cent of their net demand and time liability). Also, the waiver would be available to banks in addition to the two per cent waiver allowed under marginal standing facility.
Market players said there were redemptions in ultra-short-term, ultra, short-term and liquid funds, as they faced mark-to-market losses — a rare event. Over 70 per cent of the money of mutual funds is in debt schemes. As of June-end, liquid and money market funds held as much as Rs 1.62 lakh crore and income funds had assets of Rs 4.41 lakh crore. The total assets of the industry in June were Rs 8.11 lakh crore.
“After RBI decided to squeeze liquidity in the system by capping the liquidity adjustment facility at Rs 75,000 crore from Wednesday, companies feared they would be stuck for their liquidity requirement and rushed to withdraw from debt funds,” said an industry player.
According to industry experts, Rs 1-1.5 lakh crore are at stake from both corporate and banks in these schemes. And, if such withdrawals happen, these schemes will end up in losses, leading to more redemption pressure.
Net asset value (NAV) of most debt schemes declined more than two per cent — translating into an annualised negative return of over 500 per cent. “It was a rude shock for a lot of investors who thought liquid schemes never made losses,” said a fund manager.
However, a lot of mutual funds didn’t sell securities in the market and borrowed from the overnight market to meet the mismatch. Also, Amfi issued a late-evening circular, asking all fund houses to value their debt securities — even those below 60 days — at market prices. At present, only the debt securities with maturity above 60 days have to be valued at market price. Those below 60 days follow the amortisation method. Sources said Amfi asked fund houses to align the prices of their debt securities below 60 days to the CRISIL Bond Matrix, which is a gauge for weighted average prices.
On Tuesday, prices of the ten-year government securities had crashed by up to Rs 3.50 and yields on the 10-year benchmark had surged 54 basis points — the highest since January 2009. On Wednesday, the 10-year bond price rose 0.11 per cent and the yield fell 1.60 basis points.
“The situation is not as bad as in 2008, as investors have become more mature. But there have been a lot of queries,” said R Sivakumar, head of fixed income, Axis Mutual fund, admitting that he was on calls since 8.30 am on Tuesday morning.
According to him, the situation is different now, because Sebi has brought in tough guidelines. “In 2008, fund managers were allowed to invest in one-year papers in their short-term schemes. Now, they can invest only in papers of up to 91 days. Also, amortisation is allowed up to 60 days. So, the freedom with fund managers is much less,” he added.