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Rs 50,000 crore prop for mutual funds

Support extended to mutual funds under the special liquidity scheme shall be exempted from banks’ capital market exposure limits
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Our Special Correspondent   |   Mumbai   |   Published 27.04.20, 11:39 PM

The Reserve Bank of India (RBI) on Monday announced a Rs 50,000-crore liquidity support programme for mutual funds that face the risk of a rash of redemptions after Franklin Mutual Fund said last week that it was closing down six credit risk funds and put redemptions on hold indefinitely.

Under the special liquidity facility scheme, which comes into effect from Monday, the RBI will conduct repo operations of 90 days tenor at the fixed repo rate of 4.4 per cent. The facility will be on-tap and open ended. Banks can submit their bids to avail of funding on any day from Monday to Friday.

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Funds availed under the scheme will be used by the banks exclusively to meet the funding requirements of mutual funds. They will extend loans and undertake outright purchase of repos against the collateral of investment grade corporate bonds, commercial paper (CPs), debentures and certificates of deposit (CDs) held by the MFs.

In a release, the RBI said: “Heightened volatility in capital markets in reaction to Covid-19 has imposed liquidity constraints on mutual funds which have intensified in the wake of the redemption pressures related to the 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 RBI note added.

The RBI added that it will review the timeline and amount, depending upon market conditions.

Support extended to mutual funds under the special liquidity scheme shall be exempted from banks’ capital market exposure limits.

Nimesh Shah of ICICI Pru said that the RBI’s credit line to the MFs is greater than the total size of the industry’s credit risk fund market and will, therefore, provide great comfort to the funds.

Mutual funds have been facing redemption pressures since the nationwide lockdown, and this has particularly affected the debt schemes with the lack of liquidity in some of their investments putting them in a spot. The effect was seen last week when Franklin Templeton closed six of their schemes down.

Since then, there have been calls for the central bank to intervene like it did in 2008 and 2013.

The RBI further said that the liquidity support availed under the facility would be eligible to be classified as held to maturity (HTM). Banks investment under the facility will be exempted from their capital market exposure limits.

The central bank said it remained vigilant and will take whatever steps are necessary to mitigate the economic impact of Covid-19 and preserve financial stability.

Industry circles welcomed the RBI move, pointing out the confidence boosting measure will calm down the panic.

“This is more of a confidence-boosting measure. Most debt mutual funds invest in AA or higher rated paper and A or below is a very small part of their portfolios. There is enough liquidity in the market for a good quality paper. However, it is important for the RBI to issue this communication and support to calm nerves. This should help settle some of the panic that was caused over the weekend over the Franklin Templeton news,” Ashish Shanker, head of investments, Motilal Oswal Private Wealth Management said.



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