Debt funds' exposure to banks' certificates of deposit doubles, shows data

Several funds reduce average maturity for schemes in anticipation of interest rates rising.

The exposure of debt mutual fund (MF) schemes to certificates of deposit (CDs) issued by banks has more than doubled in the past year.

Meanwhile, exposure to commercial papers issued by non-banking financial companies (NBFCs) and government securities (G-secs) has increased 17.5 per cent and 7.6 per cent, respectively.

A large part of the investments in G-secs has been made in low-duration bonds on fears of rising interest rates, say industry players.

The exposure to G-secs stood at Rs 2.93 trillion in May, compared with Rs 2.73 trillion a year ago, reveals the Securities and Exchange Board of India data. Deployment in bank CDs, however, surged to Rs 1.58 trillion in May.

“Most debt schemes have statutory liquidity requirements, wherein funds have to invest in G-secs/treasury bills for maintaining liquidity. This could explain the high G-sec holdings,” says Sandeep Bagla, chief executive officer, TRUST MF.

The carry in short-tenure G-secs is quite attractive. In the past few months, debt MFs have reduced the average maturity for several debt schemes in anticipation of interest-rate hikes.

Typically, the prices of fixed-income securities are determined by the prevailing interest rates. Interest rates and prices are inversely proportional. When interest rates decline, the prices of fixed-income securities increase. When interest rates are hiked, the prices of fixed income securities come down.

In the past two months, the Reserve Bank of India has hiked interest rates by 90 basis points (bps) to rein in rising inflation.

The sharp increase in investments of bank CDs is on the back of credit offtake pick-up. The expectations of lower deposit growth and increased credit cost amid inflationary pressures have prompted banks to issue these instruments over the past few months, said MF executives.

According to rating agency CARE, bank credit witnessed strong growth of 12.1 per cent year-on-year (YoY), expanding by a significant 611 bps for the fortnight ended May 20 - up from 6 per cent in the year-ago period (May 21, 2021).

“After modest credit growth in recent years, the outlook for bank credit growth is expected to remain positive due to economic expansion, rise in government and private capital expenditure, rising commodity prices, implementation of production-linked incentive scheme, extension of emergency credit lines for micro, small and medium enterprises, and retail credit push,” said the rating agency in its note.

Meanwhile, debt fund managers trimmed their exposure to CDs issued by NBFCs and bonds issued by public sector undertakings by 18 per cent and 28 per cent (YoY), respectively.