Mutual Fund companies demand RBI credit line for short-term funds

MUMBAI: There is a growing demand for measures by the Reserve Bank of India (RBI) to support the mutual fund industry, which is facing redemptions in short-duration debt market funds.
The central bank had stepped in during the 2008 global financial crisis, industry players said. The steps could include opening a line of credit for fund houses so that managers don’t sell debt papers at whatever price they get, which pulls down prices.
Top fund industry officials want the RBI to move to support the commercial paper market just like US Fed last week announced to support the commercial paper (CP) market there.In India, the CP market is already showing some stress with the yield of some of the top rated papers now up by about two percentage points since the start of the month. Since yields on a debt instrument is inversely related to its price, the prices of these papers have fallen drastically during the same time.
During the peak of 2008 crisis which also affected India’s credit market, the RBI had allowed fund houses to borrow from it and face their redemptions rather than going for fire sale of their portfolio, which could have led to a crash in prices of those papers. Once the stress subsided and redemptions came back to the normal level, the fund houses repaid the money they had taken from the RBI.
“It (an RBI credit line) will certainly help. Even if the line isn’t used, just the fact that it is there will deter investors from panicking,” said a top fund manager. Although fund managers are yet to go into a fire sell mode, “a liquidity backstop will bring back order in the (MF) industry,” the fund manager said.
According to Amfi’s February 2020 data, short term funds — that included overnight, liquid, ultra short duration, low duration, money market and short duration funds — together were managing money worth nearly Rs 9 lakh crore, translating to about 31% of the MF industry’s total assets.