Banks’ flows into MFs rise in August, but...

Liquidity got better in August, much better. But it may be time to hold the cheer.

Data released by the Reserve Bank of India (RBI) on its website on Friday show banks parked Rs42,454 crore in mutual funds in the fortnight ended August 13, 2010, 18.6% more compared with Rs35,779 crore parked in the fortnight ended July 30, 2010.

Liquidity was so good during August 23- 27 (Monday-Friday) that banks borrowed under the daily liquidity adjustment facility (LAF) window of the RBI only on Monday, August 23 - and that too just Rs3,005 crore.

But the prevailing good liquidity situation is seen shortlived as the second installment of advance tax payment is around the corner, which will squeeze the funds out of the system, said experts.

Suresh Ganapathy, head of financial research team, Macquarie Securities, said during the advance tax payment season, liquidity is generally low so always causes an issue.

“Banks will have to resort to the repo window,” he said.

KR Kamath, chairman and managing director, Punjab National Bank, said if liquidity gets built in this week, it will get utilised first.

“Only then banks will look at repo,” he said.

Saturday marked the start of a new reporting fortnight for banks, which will end on September 10 after which another reporting fortnight begins.

At the start of a new reporting fortnight, there is strong demand from banks to meet their reserves requirements.

This is seen putting pressure on call money rates.

“I expect call rates to go above 5.50% from Monday and will remain between 5.75%-6% in the last fortnight of September,” said K Ramkumar, head of fixed income, Sundaram BNP Paribas Mutual Fund. On Saturday, two-day call rate ended at 5.20%, compared with 4.65%-4.70% on Friday.

Companies have to make their advance tax payments on or before September 15.

Due to this, they may resort to redeeming their investments in mutual funds.
“There could be some pressure on redemptions but it will be of the scale of normal quarterly cycle,” said Dhirendra Kumar, CEO of the New Delhi-based mutual funds research firm Value Research.

What adds pressure would be the weekly auction of gilts scheduled.

“There will be gilt issuances from the government since 63% of the governement borrowing has to be completed by September end. So there will be pressure on liquidity,” said Sachchidanand Shukla, senior vice-president and economist, Institutional Equity Research, Enam Securities.