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The Reserve Bank of India’s liquidity tightening impact on liquid funds of asset management companies is attracting companies towards short-term fixed deposits of banks. Banks have also responded by hiking their short-term rates to keep attracting companies.
On July 16, after RBI announced the tightening of the liquidity adjustment facility to Rs 75,000 crore, banks and companies had aggressively started withdrawing from ultra short-term and liquid funds. This resulted in liquid funds giving negative returns.
Said a senior State Bank of India official said,' We have witnessed 20% growth in the inflows of unfixed deposited in just one month (end of July over June) due to high volatility in market after RBI actions.'
The mid size companies and small enterprises, which have surplus money but lack sophisticated, have become cautious in volatile environment. Perhaps, concerns safety takes precedence over returns, said two executives with large public sector banks.
There has been some recovery in liquid funds. The returns in the past week were for a fortnightly liquid fund was 7%. However, ultra short-term funds returned only 3% due to the high volatility.
Banks have begun to hike deposit rates to attract the money. After Axis Bank and HDFC Bank, Deutsche Bank AG India unit has raised deposit rates 25-150 basis points across various maturities. The hike is quite sharp in the case of different maturities up to one year. It raised rate for 271 days to one year to 8.5% from 7%.
HDFC Bank has increased deposit rates on maturities ranging from seven days to up to six months by 100 basis points though reduced rates on deposits maturing between six months to one year by 75 basis points. Axis Bank increased 30 days to 13 months deposit rates by 50-225 bps.
According to a corporate head of a private sector bank, companies have become quite nervous with the negative returns because they invest substantial amounts,' said the corporate banking head of a private sector bank. 'A leading FMCG company that typically has over Rs 4,000-5,000 crore at one time in liquid funds has recently chosen to shift this amount to short-term bank deposits. And there are many such cases,' he said, adding that banks are under pressure to raise rates in order to hold on these large clients.
SBI had launched product 'unfixed deposits' about 18 months ago to work parallel to liquid fund schemes of mutual funds. These deposits are available for term ranging from seven days to less than 1 year. Money can be withdrawn anytime after 7 days, without charges. If unit\company has some spare cash, that too in large amounts, it could fetch higher return and good liquidity. The sharp movement in bond yields has raised the uncertainty.
An IDBI Bank official said corporate have become careful about the protecting the value besides safety. The volatility in the money markets has made them cautious. The feedback indicates companies with surplus are working on reallocation of funds and moving them to deposits.
Events in last the three weeks have made companies with varying sizes to review their investment strategies. The liquid funds had seen redemption pressure from banks. Now with sharp rise in yields, MF funds run risk of booking mark to market losses, pointed out a financial sector analyst.
