RBI alert on circular fund movement in MFs,banks

As on September 11,2009,MF lending in CBLO was Rs 59,899 crore and Rs 46,754 crore in the market repo while banks’ outstanding investment in mutual funds was Rs 1,56,573 crore. “As of now,everything is moving okay,but the situation can turn topsy-turvy during extreme circumstances,” said a banker.

According to the RBI,transaction volumes in CBLO and market repo segments continued to remain high during Q2 of 2009-10 reflecting the easy liquidity and active market conditions. Banks as a group are the major borrowers in the collateralised segment whereas mutual funds continue to remain the single largest lender of funds in that segment. “In fact,more than 75 per cent of the lending in the collateralised segment was contributed by the MFs in Q2,reflecting their continued enhanced lending capacity. The collateralised market remained the predominant segment of the money market,accounting for more than 80 per cent of the total volume in the money market in Q2,” the RBI said.

CBLO — normally with a maturity of one to 90 days which can be extended up to one year — is a product developed for the benefit of the entities who have either been phased out from inter bank call money market or have been given restricted participation in terms of ceiling on call borrowing and lending transactions and who do not have access to the call money market. CBLO is a discounted instrument available in electronic book entry form for the maturity period ranging from one day to ninety Days (can be made available up to one year as per RBI guidelines).

Interest rates in the collateralised segments of the money market — the market repo (outside the LAF) and the CBLO — moved in tandem with the call rate during Q2 but remained below the call rate. The weighted average interest rate in the collateralised segment of the money market marginally increased to 2.7 per cent during Q2 of 2009-10 from 2.4 per cent during Q1,the RBI said.