Mumbai: The Reserve Bank of India (RBI) on Monday announced a special liquidity facility for mutual funds worth Rs 50,000 crore to mitigate liquidity pressures after US-based Franklin Templeton wound up six of its India funds.
Even prior to coronavirus pandemic, credit markets in India have been under pressure.
“With a view to easing liquiduty pressures on mutual funds, it has been decided to open a special liquidity facility for mutual funds of Rs 50,000 crore,” said the central bank in a statement.
“Heightened volatility in capital markets in reaction to COVID-19 has imposed liquidity strains on mutual funds which have intensified in the wake of redemption pressures related to the closure of some debt mutual funds and potential contagious effects therefrom,” it said.
The stress is confined to the high-risk debt mutual fund segment at this stage and the larger industry remains liquid.
The RBI has stated that it remains vigilant and will take whatever steps are necessary to mitigate the economic impact of COVID-19 and preserve financial stability. With a view to easing liquidity pressures on MFs, it has been decided to open a special liquidity facility for mutual funds of ₹ 50,000 crore.
“Under the SLF-MF, the RBI shall conduct repo operations of 90 days tenor at the fixed repo rate. The SLF-MF is on-tap and open-ended, and banks can submit their bids to avail funding on any day from Monday to Friday (excluding holidays). The scheme is available from today i.e., April 27, 2020 till May 11, 2020 or up to utilization of the allocated amount, whichever is earlier. The Reserve Bank will review the timeline and amount, depending upon market conditions,” the statement read.
“Funds availed under the SLF-MF shall be used by banks exclusively for meeting the liquidity requirements of MFs by (1) extending loans, and (2) undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs,” it added.