RBI to open Rs 25K cr window to meet MF redemption pressure

Jul 18 2013, 01:46 IST
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SummaryThe Reserve Bank of India (RBI) on Wednesday opened a special funding window for mutual funds to cut their losses from the interest rate hikes carried out on Monday

The Reserve Bank of India (RBI) on Wednesday opened a special funding window for mutual funds to cut their losses from the interest rate hikes carried out on Monday.

The window allows the mutual funds to borrow money at low rates of interest to tide over their asset-liability mismatch. On Tuesday the yields on short-term government papers rose in response to the hike in marginal standing facility rates made by RBI. Higher yield on bonds lowers the income for the holders. With the yields rising, the mutual funds which had stocked up on those papers were into red.

To cut the losses, the funds rushed to sell their stocks, which further pushed up yields (and reduced their price). The RBI window has given the funds the option to use those papers to borrow at lower rates and so defer selling them in the markets. “It is a sort of similar situation to the one in 2008, when RBI, too, offered relief”, said Sanjay Sinha, chief, Citrus Advisors.

An RBI notification issued on Wednesday said it will conduct a special three-day repo at an interest rate of 10.25 per cent for a notified amount of Rs 25,000 crore with a view to enabling banks to meet the liquidity requirements of mutual funds. This facility will be made available for a temporary period until further notice.

The worst affected in the mutual fund industry were the liquid and money market funds — with assets under management of Rs 1,60,000 crore.

Yes Bank managing director Rana Kapoor said, “The rates have somewhat stabilised now indicating that the availability of funds within the banking system remains comfortable.”

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