RBI rolls out Rs 50,000 crore liquidity support for mutual funds

This comes as mutual funds face liquidity strains due to heightened volatility in capital markets in the wake of the COVID-19 pandemic.
RBI rolls out Rs 50,000 crore liquidity support for mutual funds
RBI rolls out Rs 50,000 crore liquidity support for mutual funds

With there being heightened volatility in the capital markets amid the COVID-19 pandemic, mutual funds have been experiencing liquidity strains. Keeping this in mind, RBI has opened a special liquidity facility for mutual funds (SLF-MF) of Rs 50,000 crore.

This comes as the liquidity constraints were worsened with Franklin Templeton’s closure of 6 debt funds, which has blocked investments of many.

The Reserve Bank of India says that potentially could have contagious effects on the industry. However, RBI has said that the stress is only confined to high-risk mutual funds and that the larger industry remains liquid.

Under the liquidity facility, RBI will be providing funds for banks at lower rates. These funds, RBI says, should be availed by banks exclusively to meet liquidity requirements of mutual funds by extending loans to mutual funds, 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 mutual funds.

The liquidity facility for mutual funds will be available from April 27, 2020 till May 11, 2020 or up to utilization of the allocated amount, whichever is earlier. RBI has said that it will review the timeline and amount, depending upon market conditions.

The SLF-MF is on-tap and open-ended, and banks can submit their bids to avail funding on any day from Monday to Friday (excluding holidays), RBI said. The minimum bid amount would be Rs 1 crore and the allotment would be in multiples of one crore rupees.

Support extended to MFs under the SLF-MF shall be exempted from banks’ capital market exposure limits.

“A market participant can place bids of amount less than or equal to the notified amount of the issue announced on a given day. RBI will reject bids of the participant if the total bid amount submitted by the participant exceeds the notified amount of the issue. The amount utilized as on previous date will be informed to market participants in the Money Market Operations (MMO) press release,” RBI added.

RBI further reiterated that it remains vigilant and will take whatever steps are necessary to mitigate the economic impact of COVID-19 and preserve financial stability.

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