Crisis management group for financial markets on cards

With high volatility in the equity and currency markets, the Government aims to set up an empowered ‘Crisis Management Group' for the financial markets. This group is likely to take shape on December 8, when the sub-committee of the Financial Stability and Development Council (FSDC) will meet.

It is proposed to nominate a Deputy Governor of the Reserve Bank of India as the Chairman, along with senior officials from market regulator SEBI, insurance regulator IRDA, pension regulator PFRDA and the Ministry of Finance as members.

A senior Government official familiar with the development says, “The effort is to bring sufficiently high level of representation, so that prompt decisions could be taken for effective crisis management.”

He said that though every segment of the financial sector has crisis prevention systems in place, an integrated system was needed to avoid sudden shocks which can quickly spread across market segments and institutions. The genesis of the crisis may be different from time to time, but the manifestation is similar.

Timely management of the crisis requires early detection of fault lines based on information on diverse institutions and markets, he added.

The official explained the whole concept with the impact of Euro zone crisis on the Indian capital and financial systems. The benchmark BSE Sensex is down by over 18 per cent from January.

Analysts say it is because foreign institutional investment in equity markets has turned negative by $187 million (January 3-December 2, 2011).

This and several other factors have impacted the rupee, which depreciated by over 15 per cent.

On the other hand, a sudden fall in the market price of equity or debt instruments might trigger redemption pressure on mutual funds.

Liquid funds

Among mutual funds, as on October 31, 2011, income funds had the largest share of assets at 45 per cent, followed by liquid or money market funds with 24 per cent and equity funds with 23 per cent. Here the most happening segment is liquid fund.

As on September 30, the investor profile of liquid funds was dominated by corporates with 75 per cent share and banks/financial institutions with 20 per cent.

Now, when corporates, banks or any other financial institutions face liquidity shortfall, they start withdrawing from liquid funds.

At the same time, fresh investment falls, leading to liquidity pressure on entities like non-banking financial companies, which receive investments from liquid funds.