The mutual fund (MF) industry has written to the Reserve Bank of India (RBI) seeking liquidity support as it fears massive redemption pressure in the Rs 5 trillion liquid scheme category, with corporate investors pulling out funds to meet debt obligations as Coronavirus outbreak disrupts business operations.
According to sources, the industry has asked the RBI to increase the line of credit to Rs 1 trillion through a repo window for corporate bond and commercial papers.
“Institutional and corporate investors are unable to get funds from banks, given the stress in the system, which is forcing them to take out funds from liquid funds. However, government intervention will be needed for extending liquidity support by RBI,” said senior executive of a fund house, requesting anonymity.
According to industry participants, the RBI has been asked to extend the liquidity support as was done during the crisis in 2008 and 2013.
Given the spike in yields in the short-term debt market, liquid schemes have started seeing negative returns. “The yields in commercial and corporate bond market has rose over 30 basis points,” said a fund manager.
In February, the liquid schemes saw outflows of Rs 43,825 crore. However, industry participants say the redemptions in March is likely to be much higher as it is year-end and the liquidity has dried up amid the panic created by the outbreak of Coronavirus.
“We have seen heavy selling by foreign institutional investors in the debt market. The entire system has become even more shallow as even AAA-rated PSU bonds are getting trade at steep risk premiums,” said another fund manager.
“With business operations disrupted by the Coronavirus scare, corporates are being forced to dip into their cash and other liquid funds to meet payment obligations,” the fund manager added.
The MF industry in its representation has pointed out that a combination of significant yield movement, low liquidity and large redemptions, has made it difficult to manage such funds.