Tight liquidity, redemption risks make mutual funds look to banks for funds

Fund houses say IL&FS crisis needs urgent credible measures to ensure no further defaults, lower risk of contagion impact

The tight liquidity environment has made it difficult for mutual funds (MFs) to offload commercial papers of duration as low as one or two days. Some large fund houses are even looking to borrow from banks to meet the incremental redemption requests, said people in the know.

“The situation is quite precarious, if not as serious as 2008. Trading in the secondary market has almost dried up. In current conditions, no borrower will tap primary markets with rates all over the place. Certificate of deposit rates are two per cent higher than overnight rates. If this situation does not improve,