A customer holds Indian rupee notes at a store in the Dadar wholesale flower market in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)  

Moody's Unit Sees Caution in India Money Market on IL&FS Default

(Bloomberg) -- A rare default in India’s corporate debt market may prompt households to scrutinize the fine print on money-market funds, which have grown in popularity over lower-yielding bank savings accounts as inflation concerns spread.

IL&FS Financial Services, a unit of a infrastructure finance firm that helped fund India’s longest tunnel, last month missed a payment on its short-term borrowings, according to a filing. While it settled the obligations in full within days, the default triggered a central bank rule that bans delinquent issuers from the commercial paper market for six months.

The episode is a reminder that money-market funds that invest in short-term instruments aren’t completely risk free, according to the Indian unit of Moody’s Investors Service. Such funds account for about a fifth of the 23 trillion rupees ($320 billion) of industry assets, up from 15 percent four years ago, data from the Association of Mutual Funds in India show.

“In the near term, expect investors to look at the mutual fund scheme fact sheet more closely before taking investment decisions,” said Karthik Srinivasan, the Mumbai-based group head of financial sector ratings at ICRA Ltd. “While there would be more caution after this rare default, we are not expecting commercial paper rates to rise or markets to dry up.”

Issuance of commercial papers rose almost 50 percent from the previous year to a record 4.9 trillion rupees in June quarter, according to ICRA, reflecting demand for shorter-term instruments as surging bond yields make long-term debt unattractive. The 10-year yield rose as much as five basis points to 8.11 percent Wednesday, the highest for a benchmark bond since November 2014.

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