Low demand for mutual funds: Reducing excess cash drives up returns on commercial paper and treasury bills

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The excess liquidity in the banking system narrowed due to the withholding tax and GST payments. In addition, the Reserve Bank of India’s liquidity management operations have played a critical role in reducing excess liquidity.

By Manish M Suvarna

Yields on three-month commercial paper (CP) and T-bills (T-bills) rose 10 to 15 basis points due to reduced excess liquidity in the banking system and weak demand for funds mutual funds.

Currently, the rates of papers issued by non-bank financial companies with a three-month maturity are between 3.70% and 3.75%, against 3.60% and 3.65% during the previous trading session. The rates on papers issued by manufacturing companies with similar maturities ranged from 3.43% to 3.50%, against 3.35% and 3.40%.

Yields on T-bills have risen more than 6 basis points over the past three weeks and in the last auction, the central bank set a threshold yield of 3.3439% on a 91-day T-bill.

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“At the margin, excess liquidity in the banking system has shrunk due to reverse repurchase agreements and prepayments from the RBI, which have resulted in higher yields on short-term securities,” said Sandeep Bagla, CEO of Trust Mutual Fund.

The excess liquidity in the banking system narrowed due to the withholding tax and GST payments. In addition, the Reserve Bank of India’s liquidity management operations have played a critical role in reducing excess liquidity.

Earlier this week, the central bank withdrew Rs 1.50 lakh crore through 7 and 3 day floating rate reverse repo auctions. As of September 14, before the prepayment of tax, the excess cash was Rs 8.46 lakh crore, and on September 22 it was estimated to be in excess of around Rs 6.85 lakh crore.

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According to a report by the Kotak Mahindra Bank, outflows worth Rs 1.10 lakh crore and Rs lakh 1 crore were estimated for GST and withholding tax, respectively. Apart from this, there have been regular outflows of auctions such as treasury bills, government development loans, and government securities.

Meanwhile, mutual funds, the biggest investors in short-term debt securities, are facing redemption pressures and have been left on the sidelines, causing the yields on these securities to rise. Usually, at the end of the quarter, fund houses see redemptions in their debt programs, and as a result, they slow down their investments. “Fund houses sell more at the end of the quarter and buy less to accumulate funds to meet cash outflows,” said a broker at a brokerage firm.

Market participants expect yields to rise further if the central bank continues to remove excess excess liquidity from the system. “However, if the market expects the operational reverse repo rate to be able to be raised, that is when there would be significant curve movement in the near term,” Bagla said. .

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