RBI commits Rs 50,000-cr special liquidity window to support mutual funds

INDIAN Stock exchanges have reacted positively to  The Reserve Bank of India’s announcement of a Rs 50,000 crore special liquidity facility for mutual fund after Franklin Templeton Mutual Fund decided to close six debt schemes. In a statement, the central bank said heightened volatility in capital markets in reaction to COVID-19 has imposed liquidity strains on mutual funds (MFs), 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 MF segment at this stage; the larger industry remains liquid, it said. “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,” it said. The Reserve Bank of India (RBI) also assured the investors that it remains vigilant and will take whatever steps are necessary to mitigate the economic impact of COVID-19 and preserve financial stability. Banks will draw funds under the Special Liquidity Facility-Mutual Fund (SLF) exclusively for meeting the liquidity requirements of MFs by extending loans. The bank could also make an outright purchase of investment-grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs as per the statement. Under the SLF-MF, the RBI would conduct repo operations of 90-days tenor at fixed repo rate. The SLF-MF is on-tap and open-ended, and banks can submit their bids to avail of funding on any day from Monday to Friday (excluding holidays).The scheme is available from today (April 27, 2020) till May 11, 2020, or up to utilisation of the allocated amount, whichever is earlier. The RBI would review the timeline and amount depending on market conditions. RBI said liquidity support availed of under the SLF-MF would be eligible to be classified as held to maturity (HTM), even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio. Exposure under this facility would not be reckoned under the Large Exposure Framework (LEF). The face value of securities acquired under the SLF-MF and kept in the HTM category would not be reckoned for computation of adjusted non-food bank credit (ANBC) for determining priority-sector targets/sub-targets. Support extended to MFs under the SLF-MF shall be exempted from banks’ capital market exposure limits.(for photo courtesy to India Today)