Indian mutual funds seek cash

Mumbai: India's mutual funds have asked the central bank to lend them short-term cash via a repurchase facility after the global financial crisis virtually paralysed the country's money markets, fund executives said.

The Reserve Bank of India (RBI) is considering the proposal to let mutual funds deposit some of the short-term bank debt they hold with the central bank in exchange for cash, said four senior executives, who are involved in talks with the central bank and declined to be named.

Central bank repurchase facilities are normally only open to banks and primary dealers.

Mutual funds would normally sell bank debt on the money market to raise cash to meet redemptions, which should have risen in September as customers pulled out money for quarterly tax payments.

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

Aditya Agarwal, managing director and head of Indian markets for fund research firm Morningstar, said the proposal was indicative of the redemption pressures on mutual funds, particularly liquid funds, and was a precautionary step to ensure enough liquidity.

"This is not a panicky but a safeguarding measure," he said.

Easing liquidity

The cost of overnight borrowing on the interbank market jumped to a 19-month high of 23 per cent on Friday, more than double the central bank's short-term lending rate of 9 per cent.

The central bank has tried to ease the liquidity squeeze and the executives said it would only agree to the mutual funds' request if the money markets failed to thaw.

The central bank lowered the proportion of deposits banks must keep in their vaults by 150 basis points from Saturday, adding Rs600 billion (Dh45.6 billion) to the amount of cash available for lending.

The stock market regulator, the Securities and Exchange Board of India (Sebi), has asked mutual funds to give details of their holdings of certificates of deposits (CDs), short-term debt sold by banks.