The RBI will open a three-day repo window on Thursday to let banks borrow at 10.25% to meet the liquidity requirements of mutual funds; mutual funds should be able to access money at 11.25-12%. The central banks measures to curb liquidity, announced late on Monday, and the consequent surge in bond yields, have seen investors pulling out money from liquid schemes over the last couple of days. Both the Securities and Exchange Board of India (Sebi) and RBI are tracking redemptions to gauge the period for which the special window needs to remain open.
This is the first time the central bank has opened a special liquidity facility for mutual funds since the Lehman crisis in 2008. According to estimates, assets of most liquid schemes have been eroded by 15-30%, higher than the 10.25% rate at which banks will access funds from the RBI window.
Meanwhile, the RBI rejected all bids it received from bond traders at the two scheduled Treasury Bill auctions to meet the government's short-term funding needs, signalling the sudden spike in yields on gilts was unwarranted. The 91-day T-bill yield was trading at 8.80% on Wednesday while the 182-day T-bill yield was quoting at 8.85%. However, most bids came in at a higher yield of 9-9.5%.
On Wednesday, yields of 10-year gilts fell 5 basis points 8.045% from 8.098% on Tuesday when it had jumped 53 bps or 7%, the largest one-day spike in yield since January 2009. This was after the central bank reined in borrowings from the RBI's liquidity adjustment facility window at Rs 75,000 crore, upped the rate for the marginal standing facility to 10.5% and said it would sell Rs 12,000 crore of bonds.
During the peak of the global financial crisis in 2008, banks were reluctant to lend to fund houses facing redemption pressures, market participants recalled, resulting in a serious liquidity crisis and forcing the RBI to create a special borrowing window for MFs. This time around, the RBI's move is being seen as a pre-emptive one as fund houses are not facing any immediate liquidity crisis.
The bulk of the pain was seen on Tuesday. Though redemptions continued, the quantum was much smaller, Killol Pandya, senior fund manager (debt), LIC Nomura MF said, adding fund houses had been comforted by the RBI's prompt action. The RBI's pre-emptive move may have already soothed nerves in the mutual fund industry with some funds suggesting that money had started returning to liquid funds after Tuesday's massive outflow.
Redemption pressure has waned today (Wednesday). Overall, about Rs 20,000-25,000 crore has come back into the system, said Dwijendra Srivastava, head (fixed income) at Sundaram MF, adding fund houses were unlikely to borrow from banks using the special window.
Liquid funds are particularly vulnerable to sudden outflows as they are a short-term parking ground for corporates and even high net worth individuals. As on June 30, 2013, assets under management of liquid funds totalled Rs 1.62 lakh crore, about 25% of total debt assets managed by the mutual fund industry.