Funds sell record Rs22,271 crore of debt in Oct

Funds sell record Rs22,271 crore of debt in Oct
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First Published: Sun, Oct 26 2008. 10 11 PM IST
Updated: Sun, Oct 26 2008. 10 11 PM IST
Mumbai: Indian mutual funds sold debt worth Rs22,271 crore in the first three weeks of October because investors are reluctant to infuse fresh money to replenish outflows caused by a surge of redemptions in a volatile market.
Analysts say the measures taken by the Reserve Bank of India (RBI) to ease a cash and credit crunch will take time to soothe the Rs5.29 trillion mutual fund industry, but inflows should return soon with the overnight inter-bank money market rate declining to around 6.5% from around 20% at the peak.
Higher call rates encourage investors in debt funds, particularly banks, to withdraw money from mutual funds and lend in the overnight call money market to earn more.
RBI has cut its policy rate by 100 basis points and banks’ cash reserve ratio (CRR), or the proportion of deposits that banks need to keep with the central bank, by 250 basis points to release Rs1 trillion into the banking system. One basis point is one-hundredth of a percentage point. Besides, it also created a Rs20,000 crore liquidity window for mutual funds.
So far, mutual funds have drawn only Rs8,800 crore from this window. On Friday, there was no taker.
The Rs22,271 crore debt sale, a record high, is only a quarter of the total sold by fund houses, according to some analyst estimates. Most sales took place through off-market deals, or the over-the-counter market. Capital market regulator Securities and Exchange Board of India collates only stock exchange data and does not take into account off-market deals. Debt funds account for some Rs3.2 trillion in assets under management.
“It is a sign of continued redemption pressure,” said Dhirendra Kumar, chief executive officer (CEO) of Value Research, a New Delhi-based mutual fund tracker.
Following the crash of some US investment banks and the state-sponsored bailout of others, credit market across the globe collapsed.
Foreign institutional investors, or FIIs, have pulled out at least $12 billion, or about Rs60,000 crore, from equity markets so far in India to send money home. This has weakened the rupee and in its bid to stem the fall of the local currency, RBI has been selling dollars, sucking rupee liquidity from the system. On Friday, the local currency fell below the 50 mark against the dollar for the first time.
Overnight inter-bank lending rates rose to as much as 20% in the second week of October, and banks and companies rushed to pull out money from mutual funds, especially liquid or money market mutual funds. These are short-term funds, where banks and companies park their surplus cash.
In the first two weeks of October, an estimated Rs30,000 crore, or about 30% of the corpus of the so-called liquid and liquid-plus schemes, had been withdrawn.
With banks refusing to lend money, fund houses had no option but to sell their debt paper to honour these redemptions.
“The CRR cuts didn’t benefit mutual funds as much as expected,” said Waqar Naqvi, CEO of Taurus Asset Management Co. Ltd.
He says that the main source of funds for asset management companies remains inflows and these haven’t picked up yet.
That the mutual fund industry continues to be under redemption pressure can be seen from the fact that they sold Rs5,189 crore of debt on 22 October, two days after RBI cut its policy rate.
Ritesh Jain, head of fixed income at Principal PNB Asset Management Co. Pvt. Ltd, which manages around Rs10,000 crore, said “it will take time for RBI’s measures to take effect”.
According to analysts, mutual funds typically see increased inflows in October, which marks the beginning of the third quarter of the fiscal year. But this time around, the acute liquidity crunch has led to net redemptions for funds and investors aren’t coming back with fresh money
“Fixed maturity plans keep on maturing. Earlier, people were deploying that money back in mutual funds but now they are not,” said Hemant Rastogi, CEO of Wise Investment Advisors, a financial advisory firm.
“There is too much of negativity all around,” said Naqvi of Taurus. “Till the time investors come back, you will find that mutual funds are net redeemers.”
Still, the industry is hopeful that investors will come back once the liquidity situation improves.
“With call rates remaining low, we should soon start to see inflows,” said Jain of Principal PNB.
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First Published: Sun, Oct 26 2008. 10 11 PM IST