Rising call rates drain out mutual funds

Cash funds see outflow of nearly Rs 4,000 cr.

Rising call rates have punched a hole in mutual funds. Banks have withdrawn close to Rs 4,000 crore from liquid and cash funds over the past couple of weeks to exploit the higher rates in the call money market.

The inter-bank call money market, where banks lend and borrow to meet their daily liquidity requirements, has been overheated in the past two weeks due to a liquidity crunch.

Overnight call money rates, rising steadily after the credit policy announcement, were hovering consistently above 6 per cent and shot up to 7 per cent in the past week. On Monday, call rates fell to 6.30/40 per cent.

Industry sources have confirmed that all leading mutual funds have seen sizeable outflows from cash funds this month. But fund managers see this as a temporary phenomenon.

"The Reserve Bank of India is taking steps to ensure that liquidity is eased and soon the situation should be normal," a debt fund manager with a leading mutual fund said.

Sameer Kamdar, national head (mutual funds), Mata Securities, a leading fund distributor in Mumbai, said, "Banks are pulling out of mutual funds to take advantage of higher call rates. But they should come back to funds once the call market cools down."

At the end of October, there were 43 liquid and money market funds with a combined corpus of Rs 74,984 crore.

This accounted for 37 per cent of a total Rs 200,000 crore in assets under the management of mutual funds.

Usually, banks and corporates park their surplus funds with cash or liquid funds which usually generate stable returns of around 5 per cent.

However, banks are pulling out their investments in mutual funds to use them directly in call markets in order to earn better returns. For the record, mutual funds are not allowed to participate in the call money market, which is purely an inter-bank market currently.