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Deepak Shenoy @deepakshenoy
, 12 tweets, 2 min read Read on Twitter
RBI and SEBI say they're on the case. This is a good piece of news and I really don't want specifics. Here's why.
There's some fear of redemptions in mutual funds. Even MFs have to be able to sell to handle redemptions. They don;t have a lender of last resort who tehy can borrow from to tide over a temporary liquidity issue.
If the redemption pressure increases, RBI will open a line of credit - through banks - for mfs to borrow and use the bonds they have as collateral. HOwever they are expected to only take the highest rated paper initially - in a full blown crisis they will take more.
If people don't go nuts and redeem their ass off, then the system will stabilize. There isn't a massive problem other than in a few companies, and those companies are mostly not borrowing from the bond markets anyhow.
But a liquidity issue can cause solvency problems. Rolling over short term debt is a very important function of markets and rolls need to happen to keep eveyrone afloat. This concept of asset liability matching is mostly bookish - in reality, people withdraw when they want.
So the point of telling us that they are ready means this: RBI will provide liquidity (in the form of pass through credit - they have done this before) if needed. SEBI is likely to supress rules that require rating or anything else that prohibits buyers from the markets.
To be more specific is not possible. The debt markets have not seized up. Some stocks have fallen but that's not abnormal. Does RBI say they'll provide liquidity? Then there will be fear that liquidity is a problem (it's not, yet). So, the better option: Don't predict,react.
As market participants, this is where you will find opportunities. THis is not the time to EXIT debt markets, indeed it's time to consider getting in. DHFL for example has 9000 cr. of cash - and short term payouts are only 7000 cr. (not including bank credit lines available).
DHFL may not be the most pristine debt but at 12% it's quite attractive (and that's the kind of yield available in the market on Friday on the NSE). Let's hope that similarly, tax free bonds come back to 8% and so on.
Opportunities will only come if there is panic. At this point, what the regulators are saying is: If there is panic, we will act. If they act, we know markets are like babies with too much sugar -they will panic even more.
Eventually they'll come around - because of two things: the RBI/SEBI firepower is immense, and because we really don't have a solvency problem with a majority of the debt market.
You've just heard the regulators say "we've got your back". Call it a plunge protection team, or an "implicit put option" - but you have to wonder if the fear of a systemic meltdown is a really rational here.
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