RBI opens special repo window for mutual funds

The Reserve Bank of India (RBI) today opened a special window to provide emergency funding to asset management companies that face a surge in redemption requests.

The move to open a special repo window for mutual funds follows a hike in RBI's short-term interest rates intended to drain off excess liquidity from the banking system, which RBI feared, was driving up speculative trading in foreign exchange.

Asset management companies are worried that they would face a surge in redemptions from investors in shorter-duration debt funds, such as money market funds, as short-term interest rates go up.

Fund managers had worried they would face a surge in redemptions from investors in shorter-duration debt funds, such as money market funds, as a direct consequence of the RBI's actions.

RBI also expects the slump in shares after it unveiled liquidity tightening measures late on Monday in an attempt to shore up the ailing rupee to hit mutual funds.

''As a contingency measure, RBI has decided to conduct a special 3-day repo at an interest rate of 10.25 per cent for a notified amount of Rs25,000 crore with a view to enabling banks to meet the liquidity requirements of mutual funds,'' RBI said in a release.

RBI said it would announce details of the facility, which is being made available on a temporary  basis, separately.

Meanwhile, after continuous net outflows, equity mutual funds finally generated a net inflow of Rs872 crore in June 2013, as redemptions slowed.

Equity mutual fund schemes have seen a net outflow of over Rs31,000 crore in the past three years, according to the data released by the Association of Mutual Funds in India.

The average monthly redemption from equity mutual funds has been around Rs5,200 crore over the same period.

Redemptions in June 2013, however, was lower at Rs2,455 crore.

The average monthly sales of equity schemes have been around Rs4,300 over the past three years. This, however, has fallen to Rs3,600 crore over the past 12 months.

Against this, the average redemptions over the past 12 months have been around Rs5,100 crore.

The total number of equity mutual fund folios has declined by approximately 89 lakh from 41.1 million as on March 2010 to 3.22 crore as of May 2013. The retail participation in equity mutual funds has also failed to pick up.

Liquid and money market funds had assets under management of Rs1,60,000 crore as of the end of June 2013.