RBI boosts liquidity for mutual funds

Tue, Oct 14 10:40 PM

By Saikat Chatterjee and Surojit Gupta

MUMBAI/NEW DELHI (Reuters) - India pumped liquidity into its markets and took measures aimed at helping its $106 billion mutual-funds industry on Tuesday as its rupee and stocks rallied after governments worldwide moved to restore confidence in the financial sector.

Reserve Bank of India (RBI) governor said after meeting the finance minister in New Delhi the market situation was under control but he could not comment on what more measures might come.

India's financial markets were badly shaken last week as the global financial crisis spread, with stocks falling almost 16 percent, the rupee hitting a record low and overnight lending rates leaping to 23 percent.

The RBI cut the amount of funds banks must keep in reserve on Saturday, releasing more than $12 billion into the banking system, and on Tuesday it injected $13 billion via its daily overnight money market operations and introduced a temporary funding window for mutual funds.

"We have reviewed the entire situation and we believe everything is under control," RBI Governor Duvvuri Subbarao told reporters after meeting the finance minister, adding the liquidity situation was comfortable.

He later met the prime minister along with the finance minister but did not make comment further.

The RBI conducted a special 15-day repo auction on Tuesday to meet the liquidity needs of mutual funds, whose investors have pulled money out to pay tax bills and due to the global financial markets turmoil.

In the auction, which was to banks specifically for lending on to funds, saw only 35 billion rupees ($730 million) taken up against 200 billion rupees on offer.

"People did not have much time to participate at the auction and did not understand it completely and hence the low numbers," said Ashish Nigam, head of fixed income at Religare AEGON Asset Management Company.

The fund industry said the move was a welcome option, however. The central bank also relaxed rules for mutual funds on using illiquid certificates of deposit issued by banks, of which the funds have been big buyers this year, as collateral.

Mutual funds would normally sell bank debt on the money market to raise cash to meet redemptions.

But India's money markets have been hit by the global financial crisis, which has wrecked banks across the United States and Europe and made lenders around the world wary of dealing with each other.

Furthermore, redemptions rose in September when customers pulled a net 456.6 billion rupees out, much higher than a net outflow of just 90 million rupees in August, according to the Association of Mutual Funds of India (AMFI).

STOCKS, CURRENCY RALLY

Subbarao spoke after markets closed. But they mostly reacted positively to the steps, with the partially convertible rupee closing up 0.4 percent at 48.04/06 per dollar and the main share index ended up 1.5 percent, building on a 7.4 percent gain the previous session.

Overnight cash rates eased to 8.75/9.00 percent from Monday's 9.75/10.00 percent, straddling the central bank's main lending rate of 9.0 percent and indicating cash conditions were easing.

Finance Minister Palaniappan Chidambaram also welcomed the move.

"The chairman of the Indian Banking Association is in touch with the banks as well as the fund industry to decide on an appropriate rate at which banks will onlend to the funds," Chidambaram said in a statement.

Senior fund executives told Reuters on Sunday on condition of anonymity that mutual funds had asked the central bank to lend them short-term cash via a repurchase facility after the global financial crisis froze India's money markets.

India's mutual funds managed 4.8 trillion rupees of funds at end-September, the equivalent of about 10 percent of the country's gross domestic product, according to data from AMFI.

They also cornered 7.7 percent of household savings in 2007/08, according to the central bank.

(Additional reporting by Nishant Kumar in Singapore, V. Ramakrishnan in MUMBAI and Manoj Kumar in NEW DELHI)

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