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 is limited to high risk debt funds and the larger industry remains liquid.
Under the scheme, the RBI will conduct repo operation 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 central bank said.
Franklin Templeton
The move comes after Franklin Templeton Mutual Fund decided to wind up six debt funds that have combined assets under management of nearly ₹26,000 crore on account of illiquid, low rated instruments in their portfolio last weak.
The fund house had said it decided to wind up the schemes to preserve the value at least at the current levels, as the value was getting eroded due to a combination of redemption pressures and mark-to-market losses due to lack of liquidity on account of the coronavirus impact on the markets.
“RBI move is very timely. This move will first improve the confidence; second, it can help in providing the necessary liquidity to mutual fund industry if anyone needs to avail it. With the yields dropping, one would assume banks may go down the credit curve and extend facilities,” said A Balasubramanian, chief executive officer, Aditya Birla Sun Life Mutual Fund and also a board member of the Association of Mutual Funds in India (AMFI).
The scheme is available from Monday 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.
RBI said that it remains vigilant and will take whatever steps are necessary to mitigate the economic impact of COVID-19 and preserve financial stability.
The facility is on-tap and open-ended, and banks can submit their bids to avail funding on any day from Monday to Friday, RBI added.
Karthik Srinivasan, Group Head, Financial Sector Rating of ICRA, said the will to reduce the volatility in bond yields arising out of increased sale of debt investments by the fund houses to meet any spike in redemption.
“With excess liquidity of around ₹4.85 trillion as on April 24, 2020, banks, however, continue to remain largely risk averse. We expect the liquidity of the higher rated papers to improve on the back of this facility. Accordingly, active participation from the banks will be key to the success of this scheme,” Mr. Srinivasan said.
