Debt schemes get 2nd RBI jolt in two weeks

But extent of redemptions less than that seen last week

Investors pulled money out of mutual fund debt schemes en masse on Wednesday, responding to the Reserve Bank of India (RBI)’s move on Tuesday to tighten short-term liquidity to defend the rupee, the second time in two weeks. But the extent of redemptions was modest compared to last week, when the central bank had moved to make money dearer, as a large chunk of the outflows from debt schemes had already taken place.

It was likely debt schemes saw redemptions worth Rs 20,000-25,000 crore on Wednesday, according to unofficial estimates by mutual fund industry officials. After RBI’s announcement to tighten liquidity on July 15, outflows over the next few days stood at about Rs 70,000 crore.

On Wednesday, banks withdrew from liquid schemes, while high net worth investors and companies pulled out of long-term bond funds such as dynamic, gilt and income funds, as yields on bonds rose and prices fell because of RBI’s move.

When bond yields rise, prices fall and vice versa.

Yields on the 10-year benchmark government bond rose about 25 basis points to 8.41 per cent. Yields on three-month certificates of deposits rose 74 basis points to 10.13 per cent. The impact of the rise in yields on the net asset value (NAV) of debt schemes couldn’t be ascertained at the time of going to print.

Banks, too, withdrew from liquid schemes, after RBI, on Tuesday, directed lenders to maintain a particular cash reserve ratio (CRR) on a daily basis starting July 27. “Banks are maintaining cash levels as a preparatory step for the tighter CRR regime,” said a bank official. Currently, banks have to maintain an average CRR only over a reporting fortnight, which allows them to dip into CRR in case of a temporary crunch

“Banks are not very comfortable cash-wise, which is why there were redemptions at their end,” said Killol Pandya, senior fund manager (debt) at LIC Nomura Mutual Fund. “Other than banks, a few corporates were also seen redeeming funds. However, most corporates decided to stay with their investments for now and wait for the situation to unfold,” he added.

Mutual fund industry officials said the impact of RBI’s latest move was cushioned, as the bulk of the money had already been withdrawn last week. Also, bond yields have not yet bounced back from last week’s levels. “Yields have not yet recovered from what happened last week. To incrementally see higher redemptions is not possible. Such bearishness in the market is not warranted,” said Pandya.

Officials from the mutual fund industry and wealth management firms said long-term debt schemes might have seen higher outflows on Wednesday, primarily because the rise in bond yields hurt returns from these products the most.

“These categories have seen maximum inflows in the last 12 months because the bet was interest rates would fall. Now, with such hopes fading, there are bound to be outflows from this category,” said Raghavendra Nath, managing director of Ladderup Wealth Management.

According to estimates by mutual fund industry officials, dynamic bond funds alone might have seen redemptions of Rs 5,000-Rs 10,000 crore. On Wednesday, Association of Mutual Fund of India is said to have sent emails to all fund houses, asking them to avoid any manipulation in reporting NAVs. This, however, couldn’t be ascertained by Business Standard.