Look who is smiling in India’s fund mart amid a crippling credit crisis

By Subhadip Sircar

Intensifying worries over credit risks in India is driving a gush of cash into securities maturing overnight.
Net inflows to overnight funds soared to 23.5 billion rupees ($339 million) in May, up from 957 million rupees in April, according to the latest data released by the Association of Mutual Funds in India. Outflows from credit risk funds, on the other hand, more than tripled to 41.6 billion rupees, the data show.

Investor confidence in the domestic credit market has been shaken by the crisis faced by shadow banks after the default of IL&FS Group in September. This past week, the bad news roared back, with troubled Dewan Housing Finance Corp.’s rating cut to default and that of Eros International Media Ltd. lowered 10 notches on concern about its ability to repay debt.

Assets held by overnight funds, a category that has seen a spate of new offerings recently, totaled 137 billion rupees at the end of May, AMFI data show. Sovereign debt funds, in comparison, just managed 77 billion rupees.

The rush of money flowing to overnight funds, popular mainly with corporate treasury departments, is also being driven by the gradual easing in the cash crunch that has lingered since the collapse of IL&FS, according to R. Sivakumar, head of fixed income at Axis Asset Management in Mumbai.