Mutual funds chasing 91-day T-bills

[Sukumar]

Bangalore: Mutual funds have begun chasing Government securities and
holding off equity purchases anticipating further corrections.


According to data from the Securities Exchange Board of India, funds
have made net purchases of close to Rs 11,376 crore since the
beginning of this month. For the same period, funds have made net
sales of Rs 595 crore of equities, according to the data. Bankers said
that some of the unit-linked insurance funds were also chasing
Treasury bills.

Most of the debt purchases were short-term Government securities,
bankers said. The preference was mostly for short-term securities,
especially 91-day Treasury bills. Funds, bankers said, picked up
shorter term securities, including T-bills both from the secondary and
primary markets. Funds are treated as non-competitive bidders in the
RBI's weekly T-bill auctions.

Driving yields down

MF participation in the T-bill auctions, have resulted in pushing down
yields or driving up prices. At last week's auctions, the non-
competitive bidders amounted to Rs 4,500 crore, the entire amount of
which was accepted by the RBI at a yield to maturity of 6.94 per cent.
But at Wednesday's auctions, the high notified amount of Rs 6,000
crore in the 91-day T-bill auction, pushed up yields slightly. The
auction comprised Rs 3,000 crore of normal issue of T-bills and
another Rs 3,000 crore market stabilisation scheme (MSS) securities
component.

Non-competitive bid component though remained on the high side, as in
the case of last week. Non-competitive bids amounted to Rs 2,422.12,
which kept the weighted average yield at 7.06 per cent.

States also queue up

Bankers also said that State Governments were also in the fray for
picking up short term treasury bills. States have switched to T-bills
instead of maintaining them as cash balances with the RBI. State
Government deposits with the RBI were just Rs 41 crore, according to
the weekly statistical supplement.

Bankers said that the preference for the 91-day T-bills were largely
on account of the high liquidity. This was in addition to the yields.
Besides, bankers said that funds preference for 91-day T-bills was
also driven by banks' reluctance to pick up bulk deposits from funds
at high yields for short-terms.

Banks are flush with deposits and credit growth has remained low.
Consequently, few banks were interested in picking up bulk deposits at
high costs, ahead of the RBI's lean season credit policy. Instead,
bankers were insisting that funds lock in bulk deposits in instruments
like certificates of deposits (CDs) for a minimum period of one year.
CDs though are treated as less liquid instruments.

Besides, bankers said the preference for T-bills was also driven by
anticipation that short- term yields were likely to soften further in
view of the liquidity overhang and the lean season, when credit
offtake is normally low.


Moreover, many of the funds anticipate that the equity markets were
likely to see a further correction in the coming weeks as corporate
results begin trickling in. Liquidating the T-bills at that point of
time was expected to generate treasury profits for the funds.

N.Sukumar
Research Analyst
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