Oct. 14: The RBI today cobbled a Rs 20,000-crore bailout package for cash-strapped mutual funds.

The bailout package seemed small for the mutual fund industry that handles a corpus of Rs 5.3 trillion and now faces a spate of redemption claims. The Telegraph had reported on Monday that banks have been pulling money out of mutual funds.

The sensex jumped by over 500 points today in response to the RBI move but the gain thinned to 174 points because of selling to book profits. Stock prices rose in Europe, too. Wall Street rallied at the open but slipped later.

Under the RBI’s plan, banks are supposed to borrow the money from the central bank at 9 per cent interest and pass it on to the mutual funds at a slightly higher rate.

Banks, however, baulked at the interest rate and picked up only Rs 3,500 crore at today’s auction that was held under a special facility that the RBI uses to pump money into the financial system.

The bailout plan comes on top of the RBI’s cash injection of over Rs 80,000 crore over the past month with the relaxation in reserve requirements for banks. The move to pump in money followed similar steps taken in Europe yesterday.

In Delhi, Prime Minister Manmohan Singh conferred with finance minister P. Chidambaram, RBI governor D. Subbarao, Planning Commission deputy chairman Montek Singh Ahluwalia and finance secretary Arun Ramanathan. Earlier, Subbarao met Chidambaram to discuss ways to boost liquidity.

“We believe everything is under control. I cannot tell you what measures are going to be taken. We have done everything that had to be done,” Subbarao said after the meeting.

US bitter pill

The US has decided to pump $250 billion into major banks — a level of state intervention that was unthinkable before the credit crisis erupted.

The American government will buy preferred shares in qualifying financial institutions, with stakes in each limited to $25 billion.

US treasury secretary Henry Paulson did not hide his unhappiness with such a step.

“We regret having to take these actions,” Paulson said. “Government owning a stake in any private US company is objectionable to most Americans, me included.”

President George W. Bush called it an essential step to ensure the viability of America’s banking system.