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MFs seek support from RBI as liquid funds see sharp rise in redemptions

Amfi has urged the central bank to reinstate the liquidity window to mutual funds to help them tide over the current liquidity crisis.

, ET Bureau|
Last Updated: Mar 23, 2020, 08.38 AM IST
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In the last couple of days, debt mutual funds have seen outflows of Rs 50,000 crore per day, said Amfi. Out of the Rs 28.28 lakh crore managed by the industry, debt schemes hold Rs 15.94 lakh crore.
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Mutual funds have approached the Reserve Bank of India seeking liquidity support fearing sharp redemptions from bond funds — mainly liquid schemes — in the coming days as risk aversion due to the coronavirus fright has sparked the flight of money from these products to bank deposits.

With several liquid funds posting losses following the spike in bond yields triggered by the selloff in the markets, several investors in this scheme category — mostly corporates who park their idle money there — have already begun pulling money out of these products, said industry officials.

In a letter to the RBI, the Association of Mutual Funds in India (Amfi), the industry body, has urged the central bank to reinstate the liquidity window to mutual funds to help them tide over the current liquidity crisis as was done in 2008 and 2013.

Amfi, which represents 41 asset managers handling investor money of about Rs 28.28 lakh crore, has asked the central bank to increase the Line of Credit to Rs 1 lakh crore through a repo window for corporate bond and commercial papers.

In the last couple of days, debt mutual funds have seen outflows of Rs 50,000 crore per day, said Amfi. Out of the Rs 28.28 lakh crore managed by the industry, debt schemes hold Rs 15.94 lakh crore.

“Owing to significant market volatility due to the Covid-19 scare and the year end, the industry is seeing significant yield movements, low liquidity and large scale redemptions,” said the letter by Amfi chairman NS Venkatesh. “This is further exacerbated by the fact that the existing stock of unlisted NCDs (non-convertible debentures) has become illiquid / untradeable since mutual funds can now only invest in listed debt instruments. The volatility and the price movement in the bond markets have defied all logic. Illiquidity and panic selling have made matters worse.”

Fund managers said the spike in bond yields over the last one week on fears of spread of Covid -19 has brought volatility in the debt markets and many institutional investors are rushing to safety by withdrdrawing money from debt funds due to year-end considerations and holding it in banks.

With uncertainty over the impact of the pandemic on economy heightened, foreign portfolio investors (FPIs) have withdrawn money across emerging markets like India in a flight to safety. All this turbulence has rubbed off on the debt market too. Low liquidity and heavy selling across bond markets have resulted in yields across AAA paper rising 80-150 basis points across 1, 2 and 4 year maturities. Repo to three-year AAA spreads have crossed 220 basis points, with historic average being 130-140 basis points, said fund managers.

“The current situation seems to be more serious and grim than the 2008-09 in the aftermath of global financial crisis and the bond market crash in 2013 due to the Rupee’s fall against the Dollar, which led to panic in bond markets and a subsequent redemption pressure on mutual funds,” the AMFI letter said.

In categories like liquid funds, fund managers point out that 85-90% investors are institutional investors while the rest is the rich and retail investors.

“The spike in bond yields has led to investors making negative returns in safe categories like liquid funds over the last one week,” says the chief investment officer at a domestic fund house. The fall in value has not gone well with treasury heads at corporate houses, which have started withdrawing more money.

The shut-down of companies and disruptions in sales would force companies to dip into their cash balances in the next few days. Also, companies usually pull money out of liquid funds every quarter end to pay advance taxes.

“No big corporate wants to take any chances. Fearing further volatility and downfall, some corporate are withdrawing early and just parking money in bank deposits,” the chief investment officer of another mid-sized fund house said.

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