RBI ANNOUNCES ₹50,000-CRORE MUTUAL FUND LIQUIDITY PLAN
₹50,000-cr credit line to aid mutual funds has been announced
MUMBAI: The Reserve Bank of India (RBI) on Monday opened a ₹50,000-crore special credit facility to help mutual funds tide over redemption pressures caused by the collapse of six Franklin Templeton funds and prevent panicked investors from withdrawing money in the midst of a crisis.
The move is primarily aimed at assuring investors that adequate money is available to meet redemption demands and to help the asset managers avoid distressed sales of holdings by mutual funds.
Franklin Templeton’s decision to wind up six credit funds for lack of liquidity has prompted fears that investors will rush to withdraw from debt funds.
“The stress is, however, confined to the high-risk debt mutual fund segment at this stage; the larger industry remains liquid,” the RBI said in its statement.
Banks can borrow the 90-day funds from RBI at the current repo rate of 4.4% and use it to on-lend to mutual funds or purchase investment-grade corporate papers held by them.
MUMBAI: The central bank on Monday opened a ₹50,000-crore special credit facility to help mutual funds tide over redemption pressures caused by the collapse of six Franklin Templeton funds and prevent panicked investors from withdrawing money in the midst of a crisis.
The Reserve Bank of India’s (RBI) move is primarily aimed at assuring investors that adequate money is available to meet redemption demands and to help the asset managers avoid distressed sales of holdings by mutual funds. Franklin Templeton’s decision to wind up six credit funds for lack of liquidity has prompted fears that investors will rush to withdraw from debt funds.
“Heightened volatility in capital markets in reaction to covid-19 has imposed liquidity strains on mutual funds, 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 mutual fund segment at this stage; the larger industry remains liquid,” RBI said in a statement.
Banks can borrow the 90-day funds from RBI at the current repo rate of 4.4% and use it to on-lend to mutual funds or purchase investment-grade corporate papers held by them. The scheme will be available from April 27 till May 11.
Banks buying the securities from mutual funds can hold it in their held-to-maturity segment, even if the total investment in that category over-shoots the central bank’s limits. The advantage of the segment is that banks do not have to account for markto-market losses in case the bond values fall further.
“Banks’ lending rate (to mutual funds) will depend on whether it is an outright purchase or a line of credit and on the quality of the underlying asset being sold or pledged,” said Arvind Chari, head of fixed income and alternatives at Quantum Advisors Pvt. Ltd.
The cost of funding would be between 7.5-9%, depending on the maturities of paper and schemes, said A Balasubramanian, managing director and chief executive of Aditya Birla Sun life Mutual Fund.
“It’s now a question of time when the banks will increase their lending down the credit curve. The RBI has done more than enough to boost liquidity in the corporate bond market and slowly we will see these steps trickling down to help the bond market. It is a big confidence booster,” said Balasubramanian.
However, while RBI’s move helps in boosting confidence, it may not have too much of an impact on debt funds with riskier debt securities in their portfolio.