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Will short term market rates rise after Sebi limits?

The cost of short-term debt in India could harden as about a..

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 Mutual Fund. “With the revised regulations, Read More – Source

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