RBI throws lifeline for mutual funds facing redemption pressure

By Beena Parmar

  • 27 Apr 2020
Credit: Reuters

Days after Franklin Templeton Mutual Fund declared the closure of six debt funds, the central bank has announced liquidity worth Rs 50,000 crore (about $6.5 billion at current exchange rate) for mutual funds in order to ease redemption pressure in the pandemic.

Under this scheme valid till 11 May, banks can avail funds for meeting the liquidity needs of mutual funds.

“The scheme is on-tap and open-ended, and banks can submit their bids to avail funding on any day from Monday to Friday (excluding holidays)…The Reserve Bank of India (RBI) will review the timeline and amount, depending upon market conditions,” the banking regulator said.

Under the scheme, the RBI shall conduct repo operations of 90 days tenor at the fixed repo rate. 

Liquidity support availed under the facility would be eligible to be classified as held to maturity (HTM) even in excess of 25% of total investment permitted to be included in the HTM bond portfolio. 

Exposures under this facility will not be reckoned under the large exposure framework (LEF).

The face value of securities acquired under the scheme and kept in the HTM category will not be reckoned for computation of adjusted non-food bank credit (ANBC) for the purpose of determining priority sector targets/sub-targets. 

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

The RBI said that the stress is confined to the high-risk debt mutual fund segment at this stage; the larger industry remains liquid.

So far, in order to pump liquidity into the country’s bond markets, the banking regulator has opened up rupee-dollar swap windows and is also conducting targeted long-term repo operations (TLTRO). 

Between 27 March and 17 April, the RBI conducted Rs 1 trillion worth of TLTRO. Banks used that money to buy bonds of AAA-rated companies.

Then, the RBI initiated another round of TLTRO of Rs 50,000 crore requiring banks to inject that money into small non-banking financial companies (NBFCs).

Following the RBI’s moves, Bloomberg reported that India is actually leading returns this month in Asia’s dollar bond market, with the country’s dollar bonds returning as much as 5.2% in April, as compared with the average 1.7% offered by other emerging economies in the region.