Investors are exiting liquid mutual funds in light of the Reserve Bank of India’s recent liquidity tightening measures and choosing to park their funds with banks, State Bank of India chairman Pratip Chaudhuri said on Wednesday.
“There is a liquidity crunch and many people are encashing their investment in liquid mutual funds and coming to banks. “We have received R5,000-6,000 crore in the last few days from redemption proceeds of MFs,” Chaudhuri said.
He, however, added that the restrictions placed on borrowing from the RBI’s liquidity adjustment facility (LAF) window was a temporary one and Union finance minister P Chidambaram had assured bankers of the same, Chaudhuri said.
“It is a temporary measure and it should not have a long-term impact,” Chaudhuri said quoting Chidambaram.
While banks which rely on short-term funding would face higher cost of funds, banks like SBI which have a large and stable retail deposit base would not be impacted much. “I don’t see any significant change in interest rate immediately,” Chaudhuri said after meeting Chidambaram, who held a meeting in Kolkata with the bankers on stalled infrastructure projects in eastern India
“Bank deposit and loans follow a different dynamic. When RBI dropped the repo rate, we didn’t drop the lending rate because we are of the view that banks’ lending rate and deposit rate follow a different dynamic,” Chaudhuri added.
RBI restricted individual bank borrowing from the LAF window to 0.50% of its deposit base and also asked banks to maintain a minimum of 99% of the cash reserve ratio requirement on a daily basis.
The SBI chairman also hinted that corporates who were earlier raising funds in the corporate bond market may return to banks for funding needs as rates in the loan and bond markets converge following the RBI’s measures.