1. In a Turnaround, RBI Opens 25k-cr Window for MFs
Two days after the Reserve Bank announced it would restrict liquidity support to banks in
order to contain the fall of the Rupee, it was forced to open a window for providing liquidity
support to mutual funds through banks to stave off redemption pressure at the fund houses.
RBI on Wednesday said it would provide Rs. 25,000 crore of liquidity to mutual funds at a penal
interest rate of 10.25%, raising doubts about the cause and effects of its efforts to stem the
currency slide. The previous such measure was during the 2008 financial crisis when liquid MFs
faced sudden redemption pressure.
The sudden jump in bond yields after RBI on Monday squeezed liquidity to stabilise the Indian
rupee had triggered redemptions as returns turned negative for debt and money market mutual
funds. Though the central bank’s decision to provide
liquidity is contrary to its Monday measures, it was compelled to do so to prevent an abnormal
jump in yields. Bond yields and prices move in opposite direction. Investors generally do not
expect negative returns in liquid schemes. Under Pressure Liquid schemes are short-term debt
funds with maturity periods of up of to 90 days. Sudden selling pressure in a market where
liquidity is already tight was posing problems for fund houses.
“In these abnormal market conditions, it won’t be possible for fund houses to meet redemption
pressure by selling securities in the market as this will create further pressure in the market.”
said Debasish Mallick, managing director and chief executive officer at IDBI Asset
Management.
Large asset management companies burned the midnight oil on Tuesday in order to reassure
big investors, mostly Corporates. In all, Rs. 6 lakh crore is invested in debt and money market
funds, accounting for 75% of assets under management.
The rupee, which climbed about 50 paise on Tuesday following the RBI measures, fell nearly 30
paise on Wednesday to end at 59.51 to the US dollar despite reforms measures by the
government. The benchmark 10-year bond was almost unchanged at 8.09% compared with

2. Tuesday’s 8.04%. Indeed, the bids in the treasury bills auction were so high that RBI rejected
them. “The repo window is likely to reduce the volatility and allow the money markets to settle
down,” said G Pradeepkumar, CEO, and Union KBC Mutual Fund. “Panic selling on account of
redemptions and subsequent sharp spike in the money market rates are expected to be
curtailed.”
Dealers expect the Reserve Bank to keep short-term rates high till some stability is back in the
markets.
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