RBI Opens ₹50,000-cr Liquidity Tap For Mutual Funds

In a bid to address concerns arising out of Franklin Templeton’s decision to wind up six debt funds, the Reserve Bank of India on Monday decided to open a special liquidity facility for mutual funds (SLF-MFs) of ₹50,000 crore. The move is aimed at easing the liquidity pressure that mutual funds face.

The liquidity infusion via banks is more than double the last two infusions in 2008 and 2013.

The new scheme will be available from April 27 to May 11 or until the allocated amount is utilised, whichever is earlier.

Nilesh Shah, Chairman, Association of Mutual Funds in India, said the liquidity facility provided by the RBI is a good confidence-building measure for mutual fund investors and will help in the normal functioning of the market.

The special repo window will be available to all LAF (liquidity adjustment facility) eligible banks against eligible collateral and can be availed of only for on-lending to mutual funds (MFs).

The RBI has opened the SLF-MFs in the backdrop of Franklin Templeton Mutual Fund deciding to close six debt schemes, citing lack of liquidity in the debt market and unprecedented redemptions in these yield-oriented schemes.

Under the SLF-MF, the RBI will conduct repo operations of 90-day tenor at the fixed repo rate. The SLF-MF is on tap and open-ended, and banks can submit their bids to avail themselves of funding on any day — Monday to Friday (excluding holidays).

“Funds availed of under the SLF-MF shall 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, debentures and certificates of deposit held by MFs,” the RBI said in a statement.

The support extended to MFs under the SLF-MF will be exempted from banks’ capital market exposure limits.

High-risk debt under stress

Nimesh Shah, Managing Director & CEO, ICICI Prudential AMC, said the move will reduce the stress being built in the corporate bond segment. However, he said the deflationary environment has pulled down prices across asset classes and made investments in debt assets more attractive now.

The RBI said exposures under this facility will not be reckoned under the Large Exposure Framework (LEF). Further, the face value of securities acquired under the SLF-MF and kept in the HTM category will not be reckoned for computation of adjusted non-food bank credit (ANBC) for the purpose of determining priority sector targets/sub-targets.

“Heightened volatility in capital markets in reaction to Covid-19 has imposed liquidity strains on 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 central bank 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.