SEBI's Mahalingam tells MF industry be prepared, gush of inflows can reverse

The Securities and Exchange Board’s Whole Time Member G Mahalingam today cautioned the 43-player MF industry that the gush of inflows in the AMC industry can reverse and industry needs to be prepared for the worst.

"We need to keep in our minds that huge amount of gushing liquidity is keeping us afloat and once this liquidity gets withdrawn we need to see how industry behaves when the flows come down,” Mahalingam said.

He was addressing at the 12th edition of CII Mutual Fund Summit held in Mumbai today.

The theme of this year’s summit was ‘Growth in Indian Asset Management Industry- Is there a New Normal?’

The regulator is keen to see how the MF industry stays afloat despite outflows.

He said MF industry is growing at a rampant pace and there are large inflows coming in the industry particularly after demonetisation.

He said Rs 3-4 lakh core have come in to the system after demonetization and substantial part of this liquidity had found its way to the MF industry.

He pointed out that for the first time banking credit had witnessed an uptick along with bank deposit growth and it’s a nascent sign of green shoots that real economy has started growing.

Additionally, he said we need to see how external factors pan out which could have an impact on the flows.

"The Fed is expected to hike interest rates by about 50-75 bps in 2018 and if real interest rates are bought down in India then fund flows may take a reverse direction," Mahalingam said.

Real interest rate is defined as the interest rate minus the inflation. Real interest rate in India is close to 2.5 percent.

Mahalingam said that there is a general debate that real interest rate of 2.5 percent does not stimulate a lot of investments but stimulates a lot of savings. So, when the US is expected to raise the interest rates while the real interest rates in India is going down then the real interest rate differential may prompt investors to pull out.

“Even if there is a reversal of flows and if the flows are going to temporarily abate all the net flows that are going to come down that will be a new reckoning for the industry,” said Mahalingam.

He said MF industry is yet to see the new normal and it will be when industry sees some fund flows moving out of the country. Currency movement will have to be closely watched that could impact the flows.