MFs cut cash holding in short-term funds

In fact, even banks may start borrowing more by way of Certificate of Deposits to fund their activities in busy season

Mutual fund houses have reduced their cash holdings in short-term funds as the liquidity in the system has become comfortable. The average cash-holding position in short-term funds was about 20 per cent after the Reserve Bank of India (RBI) tightened liquidity in mid-July to arrest volatility in the rupee. The cash-holding position has now been reduced to five-10 per cent and, in some cases, even below five per cent.

In its second-quarter monetary policy review on October 29, RBI had reduced the marginal standing facility (MSF) rate by 25 basis points (bps) to 8.75 per cent. Besides, RBI also increased the liquidity provided through term repos of seven-14 day tenures to 0.50 per cent of banks’ net demand and time liabilities (NDTL) from 0.25 per cent earlier.

“Due to lowering of the MSF rate, liquidity was back into the system. Now we are buying papers in the tenure of one-two months and locking these. In short-term funds, the cash holding was about 15-20 per cent three months ago; now, it is five-10 per cent,” said Dwijendra Srivastava, head of fixed income at Sundaram Mutual Fund.

Short-term borrowing by corporates through commercial papers picked up due to comfortable liquidity, as investors such as fund houses are willing to deploy funds.

“Ahead of a monetary policy, there is a tendency to hold back cash and wait for the outcome. On a favourable outcome, deployment of the money starts. In our fund houses, we are already invested. Our cash-holding level will be below five per cent in short-term funds,” said Lakshmi Iyer, head (fixed income and product) at Kotak Mahindra Mutual Fund.

Banks may start borrowing more through certificates of deposits (fund houses’ preferred mode of investment).

Arvind Chari, head of fixed income and alternatives at Quantum Advisors, however, says liquidity may tighten again in the festive season, as currency in circulation goes up. Owing to this, fund managers might resort to increasing cash holdings.