RBI announces special liquidity facility of Rs 50,000 crore for mutual funds

(Representative image)
NEW DELHI: In a big relief for investors, the Reserve Bank of India (RBI) on Monday announced a special liquidity facility (SLF-MF) of Rs 50,000 crore to ease liquidity pressures on mutual funds (MFs) which have cropped up as a result of heightened volatility in capital markets due to the Covid-19 pandemic.
"The RBI 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. With a view to easing liquidity pressures on MFs, it has been decided to open a special liquidity facility for mutual funds of Rs 50,000 crore," the central bank said in a statement.
The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid, it said.
The decision came after one of the top fund houses in India -- Frankiln Templeton Mutual Funds on April 24 -- decided to shut down six of its debt funds due to liquidity troubles in the bond market triggered by Covid-related issues.

Under the facility, the RBI will conduct repo operations of 90 days tenor at the fixed repo rate. Banks can submit their bids to avail funding on any day from Monday to Friday (excluding holidays), the RBI said.
"The scheme is available from today ie, April 27, 2020 till May 11, 2020 or up to utilisation of the allocated amount, whichever is earlier," the circular added.
Funds availed 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 (CPs), debentures and certificates of deposit (CDs) held by MFs.
In case of over-subscription of the notified amount on any given day, the central bank said the allotment will be done on pro-rata basis.
"RBI will, however, reserve the right to inject marginally higher amount than the notified amount due to rounding effects," it said.
The minimum bid amount would be Rs 1 crore and multiples thereof.
Last time, the RBI had opened a special borrowing window of Rs 25,000 crore for banks to help meet the cash requirements of mutual funds in July 2013.
Following the collapse of Lehman Brothers, RBI in October 2008 had provided a similar additional liquidity support exclusively for mutual fund industry.
(With agency inputs)
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