RBI opens borrowing window for MFs | Value Research SEBI and RBI have moved fast to ensure smooth functioning of debt funds in the face of sharp decline and redemption pressures

RBI opens borrowing window for MFs

SEBI and RBI have moved fast to ensure smooth functioning of debt funds in the face of sharp decline and redemption pressures

In an early morning action today, RBI and SEBI have created a special Rs 25,000 crore borrowing facility for mutual funds to manage the heavy redemptions that are expected to result from the sharp losses that debt funds have suffered. The losses have resulted from the sudden tightening of liquidity and hike in overnight rates by the Reserve Bank and the subsequent fall in bond values (see earlier story below).

As a result of the sharp hike in the Marginal Standing Facility rate by the Reserve Bank late on the 15th, all debt funds have reported sharp losses . For investors, the most alarming news is that liquid funds are also part of the rout. Investors park short-term cash in liquid funds under the assurance that losses are practically impossible.

However, all bonds--even short-term ones--saw sharp losses yesterday. Generally, the daily accrual of interest in short-maturity bonds is enough to take care of any volatility. However, so sharp was the decline in bonds' market value that the mandatory valuation methodology compelled funds to register losses.

Here are the category averages for different fund categories. The loss is as of 16th July over 15th July.


Category Avg Return (%)
Gilt Medium & Long Term -2.59
Income -2.03
Short Term -1.39
FMP -0.92
Others -0.77
Gilt Short Term -0.71
Ultra Short Term -0.47
Liquid -0.18
Overall -1.02


In conversations with Value Research, some industry leaders expressed fears that the loss may lead to an exodus from liquid funds. If that happens, it may lead to a cascade of problems as funds run short of liquidity. There's also talk of a special relaxation of borrowing limits by funds to tide over any temporary liquidity crisis.

However, since the severest impact of the RBI's actions is expected to be a one-day event, investors who stay invested will likely see a recovery of values and higher returns.

Said Dwijendra Srivastava, Head Fixed Income at Sundaram Mutual Fund, "There has been obviously impact on the liquid funds as well as long term bonds funds after the action of Reserve Bank of India. Money markets securities specially in the 60 day bucket have moved by 250 basis points. Yesterday money markets securities were trading at around 7.6 percent levels. These have shot up to 10.25 per cent today and will lead to negative returns in liquid funds. Going forward some uncertainty will prevail but it should be settled in few days time and now the rates are looking very attractive."

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