RBI announces special liquidity facility for mutual funds

A special window of ₹50,000 crore has been allocated in view of the redemption pressure that the fund houses are facing, it says

The Reserve Bank of India (RBI) logo is pictured outside its head office in Mumbai May 3, 2011. India's central bank raised interest rates by a sharper-than-expected 50 basis points on Tuesday and said fighting inflation is its priority, even at the expense of short-term growth. The rate rise was its ninth since March 2010, and exceeded market and economists' expectations for a 25 basis point rise, although the case for stronger action had been building since March headline inflation reached nearly 9 percent. REUTERS/Danish Siddiqui (INDIA - Tags: BUSINESS)

The Reserve Bank of India (RBI) has announced a special window of ₹50,000 crore for Mutual Funds in view of the redemption pressure that the fund houses are facing.

While announcing the window, the RBI said the liquidity stress was limited to high risk debt funds and the larger industry remained liquid. Under the scheme, the RBI will conduct repo operations of 90 day tenor at the fixed rate repo.

Funds availed under this facility will be used by banks exclusively for meeting the liquidity requirements of MFs by extending loans, and 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.

The scheme is available from today i.e., April 27, 2020, till May 11, 2020, or up to utilisation of the allocated amount, whichever is earlier. The RBI will review the timeline and amount, depending upon market conditions.

“Heightened volatility in capital markets in reaction to COVID-19 has imposed liquidity strains on mutual funds (MFs), which have intensified in the wake of redemption pressures related to closure of some debt MFs and potential contagious effects therefrom. The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid,” the Central bank said.

The RBI said that it remained vigilant and would take whatever steps were necessary to mitigate the economic impact of COVID-19 and preserve financial stability.

The facility was on-tap and open-ended, and banks could submit their bids to avail funding on any day from Monday to Friday, the RBI added.