Here's how RBI move will help mutual fund investment

Moneycontrol Bureau

The Reserve Bank of India (RBI) on Wednesday allowed banks, a special dispensation, to borrow up to Rs 25,000 crore. Lenders can lend the same to mutual fund houses, which are facing redemption pressure on their debt schemes due to sudden spurt in bond yields.

"RBI will be opening a special repo window for a notified amount of Rs. 25,000 crore with a view to enable banks to meet the liquidity requirement of mutual funds. The tenure of the special repo will be three days (excluding the intervening Saturdays and holidays). The rate of interest on amount availed under the special repo will be 10.25 percent," the central bank said in a notification.

Also read: Why fixed income funds are more attractive now

Nature of special repo borrowing....

The first special repo operation for 3 days will be conducted on July 18, 2013 between 2.30 PM and 3.00 PM with reversal on July 23, 2013. The second special repo operation will be conducted on July 23, 2013 with reversal on July 26, 2013. Subsequent operations will be carried out accordingly at interval of three days (excluding the intervening Saturdays and holidays).

Banks on a daily basis, borrow overnight funds from RBI at repo rate, which is at 7.25 percent. They park their excess funds through reverse repo window at 6.25 percent. Banks can also borrow through marginal standing facility (MSF). In banking parlance, the whole process is called Liquidity Adjustment Facility (LAF). The additional repo window announced to facilitate mutual funds has also formed a part of LAF.

Must read: RBI opens new attack to clamp rupee free fall

SLR exemption of banks

"It should be strictly ensured that the funds availed under this facility are used exclusively for meeting the liquidity requirements of mutual funds," RBI cautioned. It added that banks, availing this facility, can seek for waiver for their statutory liquidity ratio (SLR) obligation up to 0.50 percent of their total deposits. Banks are mandated to maintain 23 percent of SLR.

Key trigger for mutual fund support

The banking regulator on Monday had announced a raft of liquidity measures to stem the rupee's free fall against the US dollar. Anticipating a imminent liquidity squeeze, the 10-year benchmark bond yield surged 50 basis points (bps) to close at 8.05 percent. This means, bond prices dropped.

Liquid and money market funds had assets under management (AUM) of Rs 1.6 lakh crore at the end of June, according to the news agency – Reuters. Banks and companies tend to be the biggest investors in liquid and money market funds to manage excess cash.

Sense of deja vu...

Consequently, investors pressed the panic button, which in turn has led to redemption in debt fund schemes. This has perhaps brought a sense of déjà vu. In 2008, at the time of global crisis, the mutual fund industry had faced a severe crisis due redemption pressure. Fund houses could not handle with the huge redemption pressure and had to be bailed out by the authorities.

"The situation is not that grave like in 2008. The redemption pressure has eased on Wednesday to an extent. Investors are realising that this is time right to invest in debt market. Irrespective of anything, this RBI liquidity support will ultimately help mutual fund investors," a chief investment officer (CIO) from an asset management company told moneycontrol.com. He did not wish to be quoted.

saikat.das@network18online.com