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Rediff News  All News  » Business » Liquidity crunch eases for mutual funds

Liquidity crunch eases for mutual funds

November 24, 2008 11:22 IST

Securities and Exchange Board of India, or Sebi, said on Saturday liquidity problems faced by mutual funds had eased, as borrowings by companies through the special window opened by the Reserve Bank of India had come down to a fifth of the permissible amount.

"Mutual funds had a liquidity issue. Fortunately in the month of November that also got reversed. Now the borrowing (from the Rs 20,000 crore or Rs 200-billion facility) has come down to 4,000 crore (Rs 40 billion), which is a good sign," Sebi chairman C B Bhave said at the HT Leadership Summit in New Delhi.

In response to liquidity problems faced by the mutual fund industry because of a surge in redemptions, RBI on October 14 announced a 14-day term repo facility to meet liquidity requirements of mutual funds.

The facility was further extended till March 31 next year.

This was facilitated through commercial banks, which was allowed by RBI to borrow up to 0.5 per cent of their net time and demand liabilities to meet the requirements of mutual funds.

"We had raised the money from banks by giving certificates of deposit as collateral. As the call money rate has come down, the inflows in liquid fund schemes have increased. We are repaying the loan through these inflows," said Vikrant Gugnani, chief executive officer, Reliance Asset Management.

Bhave also said an analysis undertaken by Sebi revealed that 90 per cent of assets under fixed maturity plans had the highest rating of AAA and P1+, indicating that redemption pressure was not triggered by the risk factor.

Battered Indian shares would be among the first to recover from the global financial crisis and not all foreign investors were exiting, Bhave said.

Asked about the Indian equity market, he said only leveraged investors were leaving the country but long-term players such as pension funds continued to invest in Indian shares.

"This country will recover most probably among the fastest in the world. When we do (recover), our weight in the world will be more than what it was," Bhave said

The Sebi chief also advised retail investors not to put all their savings in equity, but diversify their investment portfolio to avoid risk.

The regulator said there was no evidence so far of market-wide wrongdoing surrounding the decline in stocks.

BS Reporters in New Delhi