INSUBCONTINENT EXCLUSIVE:
The cost of short-term debt in India could harden as about a sixth of Rs 32 lakh crore in outstanding bonds are due for redemption in FY20,
amplifying the impact of general risk aversion and the recently announced liquid mutual-fund straitjacket on broader interest rates.
Risk
aversion, according to a Jefferies report, has increased in India in the light of frequent credit rating downgrades, with para banks and
home financiers struggling to raise funds in the aftermath of defaults by infrastructure financier IL-FS
Of about Rs 32 lakh crore of corporate debt/non convertible debenture Jefferies examined, gross redemption in FY20 is 16%, in line with
historical average.
Meanwhile, the market regulator has tightened norms for liquid mutual funds to prevent stress in the money markets,
impounding a larger proportion of portfolios to help lower systematic and liquidity risks
The Securities Exchange Board of India (Sebi) has mandated that liquid schemes of mutual funds should hold at least 20 per cent in assets
such as government papers and cash
There will be an exit load if investors in liquid schemes exit within seven days, the regulator has said.
“There could be some immediate
redemptions from liquid schemes before the new rules get implemented,” said Tarun Birani, CEO, TBNG Capital Advisors
“Corporates may withdraw some money as select caps imposed by the market regulator may be detrimental
Accordingly, demand for money market securities where funds invest for liquid schemes would come down to an extent, hardening short-term
market rates.”
Sebi is yet to announce the date from which new norms would apply to liquid mutual funds
To reduce risk concentration, the regulator has also reduced the investment exposure of debt schemes to any sector to 20% from 25%
earlier.
“Liquid funds are the single largest segment in the money markets,” said Rajeev Radhakrishnan, head of fixed-income at SBI
“With the revised regulations, if the overall AUM under this category reduces, it is likely that the demand for money markets securities
In this situation one may witness some hardening of short-term rates at the margin.”
Similarly, exit loads for investments made within
seven days would also prompt funds to invest in T-Bills, likely raising market rates for corporate borrowers.
“Exit loads will lead to
disintermediation, and institutions will directly park their surplus funds in T-bills,” said Soumyajit Niyogi, associate director, India
“This, coupled with the creation of a liquidity buffer by investing 20% in highly liquid and almost zero risk instruments, would pull down
sovereign yields amid some redemption pressure on liquid schemes
This in turn, should raise corporate market rates.”
