Special liquidity facility of up to 500 billion rupees for mutual funds by RBI

CIOReviewIndia Team | Monday, 27 April 2020, 10:40 IST

Special liquidity facility of up to 500 billion rupees for mutual funds by RBI

The RBI today said that it is planning to open a special liquidity facility of up to 500 billion rupees to help mutual funds tide over a severe liquidity strain imposed by the COVID-19 pandemic and redemption pressures.

Fund houses in the country have struggled to diminish investors’ fear of a flood of redemption requests after Franklin Templeton Mutual Fund said on last Thursday, that it would wind up six credit funds due to lack of liquidity.

The Federal Bank said, the stress is, however, restricted to the high-risk debt mutual fund segment at this stage; the larger industry remains liquid.

It also added that it would conduct repo operations for 90 days’ tenor at the fixed repo rate and funds will be available on-tap and open-ended.

HDFC Asset Management Co (HDFA.NS) jumped as much 6.48 per cent, while Nippon Life India Asset Management Ltd (NIPF.NS) rose as much as 12.7 per cent which has been the biggest one-day gain since March 2019.

Furthermore, analysts had mixed opinions over the success of the move, and stated that banks would not lend to high-risk funds through the presence of a window that would itself help calm investors’ nerves.

“It’s good, hope is retained that the corporate bond market will improve on liquidity and credit spread after 90 days of day back time of SLF-MF scheme,” said J.Moses Harding, an independent strategist and consultant who was formerly a banker.

“Banks would be seen comfortable to lend to top quartile, similar to non-bank finance companies, but appetite will be low on others from counterparty risk,” he added.

Banks will need to access the funds from the Central Bank at the repo window and extend loans to mutual funds, purchase outright investment grade corporate bonds or commercial papers or certificates of deposits from them.

The Central Bank said exposures under this facility will not be reckoned under the large exposures framework and will be classified as “held-to-maturity”, even in excess of the permissible 25 per cent of total investment. Moreover,the timeline and amount will be reviewed based on market conditions,it added.

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