Liquid funds see huge outflows as RBI's liquidity moves boost yields

Mumbai: Liquid funds, which are usually a favoured avenue amongst debt mutual funds for corporates to park short-term cash, have seen hefty outflows as the Reserve Bank of India’s resolve to tighten banking system liquidity conditions has exacerbated cyclical outflows at the end of the half-year.

Data released by the Association of Mutual Funds in India (AMFI) last week showed that liquid funds witnessed net outflows worth ₹74,176 crore in September – the highest for any category within debt oriented schemes. The overall net outflow for the debt schemes in September was at ₹1.01 trillion, the data showed. In the previous month, liquid funds had seen net outflows worth ₹26,823.68 crore.

“In the September quarter we have traditionally seen that a lot of bank money is redeemed out of liquid funds because of the half-yearly close. If banks remain invested in liquid funds, they have to maintain higher levels of capital,” said Dhawal Dalal, senior EVP- fixed income, Edelweiss AMC.

“Generally, there have been inflows in October, but I am not sure if it’s in proportion to the outflow seen at the end of September because the banking system liquidity has tightened and is now in a marginal deficit. As the RBI governor has alluded, there are some banks which possess surplus liquidity and some banks with permanent negative liquidity,” he said.

Liquid funds are debt mutual funds which invest in highly liquid money market securities such as Treasury Bills issued by the government, commercial papers issued by companies and certificates of deposits issued by banks. Typically, the Net Asset Value (NAV) of liquid funds are computed for 365 days. Higher bond yields lead to a decline in NAV of debt mutual funds as bond prices and yields move inversely.

Yields on T-bills and rates on certificates of deposits and commercial papers have risen sharply since August as the RBI has taken steps to drain the banking system of excess liquidity.

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