REFLECTING tight liquidity conditions in the money market, banks have pulled out close to Rs 38,000 crore in the last four months from various mutual fund (MF) schemes. According to the latest Reserve Bank of India (RBI) figures, total MF investments dipped to Rs 27,691 crore as of Feb 12 09 from a high of Rs 59,700 crore as of May 08.
Officials at fund houses point out that most of the MF investments by banks are in liquid or liquid-plus schemes, which almost work as a current account as far as liquidity is concerned and yet earn a return, which the banks do not earn in a current account. Banks often park surplus funds in such schemes that helps them earn some extra return and yet retain the liquidity of the funds.
The tightening domestic liquidity in recent times has been primarily due to advance tax outflows and forex intervention. However, this is likely to be transient in nature once the quarter-end pressures are off and due to the liquidity measures undertaken by RBI. Liquidity conditions are tight and the surplus funds with banks is eroding which is forcing banks to liquidate their investments in mutual funds.
Besides, banks also have an option to offload their stock of surplus government bonds (Banks have to invest 25% of the deposit they mobilise in government bonds). Though they have also been selling surplus bonds, since MF investments are not zero risk unlike government bonds, banks would prefer offloading those investments which are more risky as it would require them to keep aside lesser capital.
Banks have been facing tight liquidity conditions for quite some time now as the central bank has been resorting to monetary tightening to rein inflation. The central bank has hiked the cash reserve ratio (CRR) —portion of bank deposits that needs to be parked with the banks — by nearly 200 basis points since April and has also hiked the benchmark repo rates in order to curb lending and contain the money supply growth.
However, banks seem to have adopted a different strategy with respect to their proprietary stock portfolios. Fortnightly data released by the RBI indicates that they have by and large been selling when indices were high and bought when prices fell. Individually, very few banks are said to have a huge proprietary portfolio. Market sources say that there could be some aggressive private banks and a couple of public sector banks who have a very huge balance sheet that their direct equity exposure is a very negligible component of their assets. Also, stocks are not as liquid as money market mutual funds schemes.
Officials at fund houses point out that most of the MF investments by banks are in liquid or liquid-plus schemes, which almost work as a current account as far as liquidity is concerned and yet earn a return, which the banks do not earn in a current account. Banks often park surplus funds in such schemes that helps them earn some extra return and yet retain the liquidity of the funds.
The tightening domestic liquidity in recent times has been primarily due to advance tax outflows and forex intervention. However, this is likely to be transient in nature once the quarter-end pressures are off and due to the liquidity measures undertaken by RBI. Liquidity conditions are tight and the surplus funds with banks is eroding which is forcing banks to liquidate their investments in mutual funds.
Besides, banks also have an option to offload their stock of surplus government bonds (Banks have to invest 25% of the deposit they mobilise in government bonds). Though they have also been selling surplus bonds, since MF investments are not zero risk unlike government bonds, banks would prefer offloading those investments which are more risky as it would require them to keep aside lesser capital.
Banks have been facing tight liquidity conditions for quite some time now as the central bank has been resorting to monetary tightening to rein inflation. The central bank has hiked the cash reserve ratio (CRR) —portion of bank deposits that needs to be parked with the banks — by nearly 200 basis points since April and has also hiked the benchmark repo rates in order to curb lending and contain the money supply growth.
However, banks seem to have adopted a different strategy with respect to their proprietary stock portfolios. Fortnightly data released by the RBI indicates that they have by and large been selling when indices were high and bought when prices fell. Individually, very few banks are said to have a huge proprietary portfolio. Market sources say that there could be some aggressive private banks and a couple of public sector banks who have a very huge balance sheet that their direct equity exposure is a very negligible component of their assets. Also, stocks are not as liquid as money market mutual funds schemes.
