Banks, corporates rush to withdraw from MFs

With redemptions requests of over Rs 50,000 cr on Tuesday, RBI opens special repo window for next 3 days at a special rate of 10.25% of Rs 25,000 cr

The Reserve Bank of India’s (RBI) liquidity tightening is already beginning to show its impact on the mutual fund industry. On Tuesday, the mutual fund industry faced redemption orders of as much as Rs 50,000 crore from banks and corporate, said officials in the mutual fund industry.

These entities park their short-term funds with fund houses.

In response to the redemption pressure, the banking regulator opened a special repo window of Rs 25,000 crore for the next three days at a special rate of 10.25% on Wednesday. This move will enable banks to meet liquidity requirements of mutual funds. This facility will be made available for a short term period till further notice.

Said Sandeep Sikka, CEO, Reliance Mutual Fund: “RBI’s special window is a welcome step. However, the industry has been able to manage to meet redemptions till now. We may or may not require this window.”

Market players said that there were redemptions in ultra short term ultra, short-term and liquid funds, depending on their maturity as they faced mark-to-market losses.

“After RBI decided to squeeze liquidity in the system by capping the liquidity adjustment facility at Rs 75,000 crore from Wednesday, companies fearing that they will be stuck for their liquidity requirement, rushed to withdraw from debt funds,” said an industry player. According to industry experts, fund houses may face more redemption pressure on liquid and ultra short-term funds.

A similar window was opened by the banking regulator in the past. In 2008, when huge redemptions hit the fixed maturity plans and debt instruments, RBI had opened a special window for mutual funds.

Said a head of a fund house, “The situation is not as bad as in 2008. But fund houses have to aggressively act immediately to ensure that banks and corporate houses do not withdraw aggressively.”

According to him, almost Rs 1-Rs 1.5 lakh crore are at stake from both corporate and banks in these schemes. And if such withdrawals happen, these schemes will end up in losses, leading to more redemption pressure.