RBI's MF lifeline bit early; rate hike possible: IDFC MF

After announcing number of steps to tighten money supply in the economy to curb exchange volatility on Monday, Reserve Bank of India today announced a lifeline for mutual fund companies.

Within 24 hours of RBI's liquidity curbing measures, many instruments owned by the fixed income mutual funds crashed. Commercial Deposits (CDs), Commercial Papers (CPs), government bonds, corporate bonds crashed on a possible redemption pressure.  To avoid this kind of panic, RBI today said that the banks will hold a three day repo in which mutual funds can borrow money at rate of 10.25 percent and the notified amount is 25,000 crore. Suyash Choudhary, Head of Fixed Income, IDFC Mutual Fund in an interview with CNBC-TV18 said that although mutual fund industry possibly didn’t need this step at this juncture, it is always good to have such support for ensuring broad based financial stability. He stressed that money markets is fairly liquid currently. Choudhary further added that RBI’s steps so far suggest that there will be further squeeze on liquidity in the economy. "Possibly some action on CRR could come about if this doesn't work. But the thought seems to be to engineer higher call rates," he explained. Also read: RBI steps to delay banks' NPA recovery process: BofA ML Below is the edited transcript of his interview with CNBC-TV18: Q: Was this a much needed lifeline. Was there a redemption pressure expected and would you have seen bonds and commercial papers (CPs) and certificate of deposits (CDs) crash further without this lifetime? A: It is good to have it but at this juncture the mutual fund industry possibly doesn’t need it but it is always good to have a support in order to ensure broad based financial stability. Yesterday mutual fund flows have or mutual fund portfolios have reprised to the current market level so yields on various funds are quite attractive for investors. Money market are fairly liquid, if not very much so but the concern could be if the RBI engineers a call rate of 10-10.25 percent, at that juncture it would be possibly more relevant to have such kind of a backstop. Q: What has been the kind of redemption pressure that you faced yesterday and what is the talk from the industry perhaps over the next few days? A: So far redemption pressure is quite business as usual. Yesterday 10 percent more than what you normally get in a single day. The hope is that inflows pickup from today, since yesterday the inflows into the industry were fairly low because there was an expectation amongst clients that returns will be not very good. So, if inflows pickup from today then I would think the situation is stable else as long as money market provides liquidity in the secondary market the industry should be fairly okay. Q: Are you going with the feeling that the RBI will hold it tight or is the market at the moment plays it as it comes? A: Everything that RBI is doing so far is to suggest that after implementing the 75,000 crore on the liquidity adjustment facility (LAF) window, they will progressively squeeze liquidity. Possibly some action on CRR could come about if this doesn’t work. But the thought seems to be to engineer higher call rates. Q: You are likely to tap this window? A: Not really. If liquidity remains in the secondary market so it is a matter of price, even if 90 day asset sale at 10 percent, as long as liquidity remains maybe not.