November 30, 2009
Mutual Funds in India: Lending to top-rated corporates below call money rates
In recent times, the money market in India has been flush with liquidity.
Around Rs 1 lac crores (US$ 21bn) was today's (30-Nov-09) turnover in the three segments of the money market. The weighted average interest rate was 3.25% p.a. in the overnight call money market. The call money market is uncollateralized. Besides, Rs 88K cr (US$ 19 bn) was parked with the Reserve Bank of India by banks at 3.25% p.a. under the central bank's reverse repo facility (only government securities are acceptable for this facility) for one day---interestingly the weighted average call money rate that is uncollateralized is similar to the reverse repo rate of 3.25% available for parking excess liquidity with the central bank. The total outstanding bank credit in India is Rs 28.91 lac cr (US$ 624 bn) while the outstanding aggregate deposits is Rs 41.67 lac cr (US$ 900 bn).
Interestingly, Mutual Funds (under their short-term debt schemes) are lending to top-rated corporates on an uncollateralized basis at Mibor plus either a negligible or even negative spreads. Mibor is the Mumbai Interbank Offer Rate--a polled rate for the inter-bank call money market--and today the Mibor was 3.30% (this benchmark is similar to London's Libor).
Are Mutual Funds mispricing risks? (Banks in India are financially sound and largely unaffected by the subprime and related crisis in the US, as well as the recent but smaller real estate bubble in Dubai. So it would normally seem inconceivable that top-rated corporates are able to borrower at lower interest rates than even banks).
Or is this a result of the exclusion of Mutual Funds from the call money market. Should this interbank market be thrown open to MFs---only on the lending side?
WHAT DO YOU THINK?
Posted by amgodbole at 04:33 PM
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