Indian bail-out reassures stock market

Investors' redemptions were guaranteed until next year

A 145bn rupee ($3bn; £1.9bn) government bail-out of the country's largest mutual fund, has reassured investors and boosted the Indian stock market.

On Saturday, Finance Minister Jaswant Singh announced measures to support the cash-strapped Unit Trust of India (UTI), including funds to repay investors.

UTI will no longer be a desperate seller

Sanjay Sachdev
IDBI Principal AMC

The 30-issue benchmark Bombay share index closed up 0.19% at 3,187.26 points, after rising as much as 1.45%.

On Friday it gained 2.15% to hit a six-week high in anticipation of the announcement.

UTI controls over half of India's $20bn mutual fund industry and is a major investor in India's leading companies.

Last year, UTI shocked investors by freezing redemptions from its key US-64 fund as stock market falls and high redemptions caused a cash crisis.

The freeze was partially lifted until May 2003 after public outrage and a parliamentary debate, and on Saturday extended until next year by Mr Singh.

"It has been decided that all earlier commitments regarding US-64 will be extended beyond May 2003," Mr Singh said.

No fire sale

Analysts had feared the fund would try an cover its liabilities by selling its significant holdings in blue chip companies.

"The government is fully backing up the UTI, that's a positive and makes a big difference to the stock market," said Sanjay Sachdev, managing director of IDBI Principal AMC.

"UTI will no longer be a desperate seller," he added.

Some analysts said the move was also an attempt by the Bharatiya Janata Party coalition government to woo middle class voters ahead of state elections in the next 12 months and a general election in 2004.

Mr Singh said the bail-out package would be "budget neutral" and is expected to be raised through a bond sale and not contribute to India's widening fiscal deficit.

He added that similar packages would be announced soon to rescue the state-run Industrial Finance Corporation of India and Industrial Development Bank of India.

The government provided 5bn rupees last month to UTI and had promised another 5bn rupees.