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Funds may raise exposure in commercial paper

Neelasri Barman  |  Mumbai 

With issuances of Certificates of Deposit (CDs) likely to come down, mutual fund houses might increase their investments in other short-term instruments. The Reserve Bank of India (RBI) had revised the framework for liquidity management last week.

The central bank said last week it would conduct more frequent term repos and overnight variable rate repo auctions. So far, RBI has been doing term repos and overnight fixed rate repo auctions. The aim is to help manage liquidity in a better way. The new framework shall begin from September 5.

"Banks' requirement for short-term CDs may not be much for meeting liquidity requirements as RBI is open to do overnight variable rate repo auctions. The intra-day liquidity requirements can be met through these repo auctions," said Saurabh Jagwani, senior manager, Andhra Bank.

NEW NORMS
  • RBI had revised the framework for liquidity management last week
  • RBI had said last week it would conduct more frequent term repos and also do overnight variable repo auctions
  • According to the latest data from Sebi, among short-term instruments, fund houses invest the most in CDs followed by CPs
  • The preference has been more for CDs issued by state-run public-sector as these are considered safe investments

RBI had said the auction amount, if any, for overnight variable rate repo auctions, would be decided based on an assessment of the liquidity conditions as well as government cash balances available for auction for the day, and it would be announced at around 2:30 PM. These auctions will be conducted daily from Monday to Friday between 3:00 and 3:30 PM. RBI had also said it might decide to increase the notified amount, based on the evolving liquidity conditions during the day.

"Even if slow down on CD issuances, fund houses can always tap the secondary market. Besides that, even commercial paper (CP) are there. The preference will be for top-rated CP," said K Ramanathan, chief investment officer at ING Investment Management.

According to the latest data from the Securities and Exchange Board of India (Sebi), among short-term instruments, fund houses invest the most in CDs followed by CPs. The preference has been more for CDs issued by state-run public sector banks as they are considered safe investments.

The July data shows 32.95 per cent of the debt assets under management are in CDs followed by about 20 per cent in CPs, 4.43 per cent in treasury bills and 5.04 per cent in Collateralised Borrowing and Lending Obligation (CBLO).

"Even treasury bills are another avenue where - compared to the past - mutual funds are investing larger amounts. This is because the spreads between treasury bills and CDs have compressed," said Suyash Choudhary, head (fixed income) at IDFC Mutual Fund. Choudhary added CDs issuances would depend on incremental credit growth of the banking system. According to him, if credit growth picks up, the issuances of CDs will continue.

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First Published: Thu, September 04 2014. 00:33 IST
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