• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• BL Club
• Smartbuy
• Books
• Gallery

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

K. Ram Kumar

Mumbai, Nov. 3 Banks are expected to step up investment of their surplus funds in short-term debt instruments such as commercial papers, treasury bills, and government securities with one-two years residual maturity. This is to address the Reserve Bank of India’s concerns over circular movement of liquidity from banks to the liquid schemes of mutual funds (MFs) and vice-versa.

The central bank’s apprehension over circular movement of funds stems from the fact that should liquidity start drying up (on the back of improved credit pick-up) banks would redeem their mutual fund investments to shore up their funds position.

Faced with redemption pressure, MFs would then resort to heavy borrowing via Clearing Corporation of India Ltd’s collateralised borrowing and lending obligation (CBLO) facility, thereby putting upward pressure on CBLO as well as call money rates.

Bankers hold the view that the RBI’s “banks should lend directly to corporates and not through the intermediation of mutual funds” message implies that the central bank is anxious about the systemic implications of the circular movement of liquidity. According to Mr Arun Kaul, Executive Director, Central Bank of India, once the board approves internal prudential limits for investment in mutual fund schemes so as to mitigate risks, banks will actively invest in short-term debt to manage their short-term liquidity.

According to industry observers, a good chunk of the over Rs 1 lakh crore excess liquidity parked by banks in liquid schemes of mutual funds could find its way into short-term debt instruments. Tepid credit appetite in the economy in the financial year, so far, has forced banks to make large investments in government securities and also fairly sizeable investments in units of mutual funds.

Credit pick-up in the financial year up to October 9 at Rs 1,14,766 crore is less than half the off-take (Rs 2,47,775 crore) during the corresponding period last year. Hence, banks had no choice but to collectively channelise their daily surplus aggregating over Rs 1 lakh crore to the low-yielding RBI’s reverse repo window.

Further, banks also invested Rs 2,11,500 crore in the financial year up to October 9 in government securities (Rs 6,169 crore in the corresponding year ago period) and deployed Rs 1,28,772 crore in liquid scheme of mutual funds (Rs 9,079 crore).

As credit pick-up has been lacklustre, outstanding investments of banks in liquid schemes of mutual funds have been in excess of Rs 1 lakh crore since April. Ease of entry and exit as well as benefit of tax exemption on dividends and regulatory arbitrage have encouraged banks to plough excess liquidity into MFs.

Banks investment in liquid schemes of mutual funds currently fetches them a return of 4.0-4.5 per cent. Depending on rating, investment in commercial papers earns them a return of 5.0-7.0 per cent. Investment in Treasury Bills gets them a return of 3-4 per cent.

More Stories on : Debt Market | Mutual Funds

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Copyright © 2009, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line