The Stress Test That Should Worry Debt Investors

In the aftermath of April 2020 Franklin Templeton debt funds crisis, SEBI mandated liquid assets holdings norms of and stress testing for open-ended debt schemes in November 2020. In June 2021, SEBI directed the Association of Mutual Funds in India to develop a liquidity risk management and stress testing framework for open ended debt schemes, excluding Overnight, and Gilt Funds. 

The June 2021 framework mandated liquidity ratios factoring investor behaviour across four categories based on investment size. It introduced 30-day Redemption at Risk, or LR-RaR, for likely outflows and 30-day Conditional Redemption at Risk, or LR-CRaR, for extreme tail-end scenarios. 

The June 2026 Financial Stability Report highlights a concerning picture of stress tests results for specified open-ended debt funds. 42 AMCs with ₹16.25 trillion assets under management across 326 schemes undertook stress testing in March 2026. Of these, 28 AMCs with 44 unique schemes ₹3.18 trillion breached the AMFI prescribed thresholds for interest rate, credit, and liquidity risks. Breaches represented 13.5% by number of schemes and 19.6% of total AUM. Liquidity risk ratios across the top 10 AMCs for 13 categories showed breaches in some scheme categories. Liquid Funds recorded acutest deficits of 31.7% LR-RaR and 51.0% LR-CRaR, while Ultra Short Duration and Credit Risk Funds also breached limits by 10.3% LR-RaR and 19.6% LR-CRaR, respectively. 

Compared to November 2025 stress tests, degradation in March 2026 liquidity ratios is evident. 51 AMCs with 18.78 trillion AUM across 323 schemes in November 2026 saw 5.6% schemes with 8.9% of total AUM breaching thresholds, versus significantly higher breaches in March 2026. Liquid Funds recorded a higher deficit for both LR-RaR and LR-CRaR during this period.  

The scale of AUM of fund categories breaching thresholds is worrisome. In March 2026, Liquid, Ultra Short Duration, and Credit Risk Funds together averaged ₹7.39 trillion—over 39% of ₹18.91 trillion AUM across all open-ended debt schemes. Yet neither the AMCs nor the regulator have disclosed how these deficiencies are being addressed.

Corporate Debt Market Development Fund
Following major NBFC defaults in 2018 and severe illiquidity in the corporate securities in March 2020, the Union Budget 2021-22 announced a backstop facility to purchase investment-grade debt securities and strengthen secondary market liquidity. During market dislocation, Corporate Debt Market Development Fund  may raise debt up to ten times its corpus, capped at ₹300 billion. In July 2023, SEBI approved establishment of the CDMDF as a close-ended 15-year Alternative Investment Fund, with its units subscribed by AMCs and the specified debt fund schemes. SEBI can activate the facility relying on its Financial Stress Index and qualitative indicators signalling market dislocation.

Amid rising geopolitical tensions and global macroeconomic uncertainty, debt market resilience faces increased pressure. India’s recent measures—tax exemptions for foreign portfolio investors on G-Secs, expanded securities under the Fully Accessible Route, and removal of limits under General Route— aim to boost capital inflows. Yet, entry of hedge, arbitrage, and leveraged funds, coupled with speculative trading, may intensify volatility. Corporate debt markets cannot remain insulated in stressed conditions, especially as FPIs gain access to credit derivatives with corporate bonds as reference assets.

The long-term stability of corporate debt markets brings focus on adequacy and sustainability of CDMDF capacity. The fund’s initial capital of ₹30.88 billion was based on AUM of specified debt schemes as of August 2022. Since then, AUM grew 49.3% from ₹11.80 trillion in August 2022 to ₹17.62 trillion by June, alongside significant portfolio shifts. SBI Funds Management reported CDMDF net assets at ₹56.66 billion on 15 July. 

However, no public disclosure exists on adequacy based on stress testing reflecting current market factors, SEBI’s Financial Stress Index trends, or prevailing market outlook analysis for investors’ awareness.

IMF’s Caution: Turning a Blind Eye
The IMF's February 2025 India Financial System Stability Assessment concluded that while bond funds appear resilient to redemption shocks, the CDMDF is designed primarily to absorb fire sales in NBFC bonds rather than a broader corporate bond market dislocation. Should stress spread beyond NBFC debt, additional support would be required. The CDMDF’s establishment may offer a psychological assurance of a safety net. However, in absence of transparency on its adequacy and sustainability against expanding size and liquidity risks of open-ended debt schemes in the prevailing environment, such misplaced confidence could leave markets fatally vulnerable. 

SEBI must take active measures to instil transparency and trust by strengthening AMC practices in liquidity risk management and disclosure, ensuring investor protection norms are upheld in true spirit. Beyond analysing fund categories deficits in the FSR, SEBI should publish CDMDF’s corpus details, including contributions by schemes and AMCs, stress test findings of CDMDF portfolio, Financial Stress Index trends, and market outlook analysis. 

AMFI’s triennial investors categorisation review and annual LR-RaR and LR-CRaR assessments are due. It must take a holistic review of the framework to identify liquidity risks of open-ended debt schemes factoring increased AUM under contemporary market dynamics. Further, transparency can be enhanced by benchmarking of liquidity ratios at scheme and AMC levels on a graded scale, similar to the product labelling and Riskometer practices.

Rather than keeping hidden in the pages of the FSR, SEBI should mandate scheme level disclosure of monthly liquidity ratios, stress / back-testing results, and remediation of deficiencies and deficits. The Key Information Memorandum should present scheme liquidity ratios against prescribed thresholds and explain any breaches and corrective measures, replacing generic boilerplate disclosures with information investors can meaningfully assess.