In an apparent effort to ease liquidity pressures on mutual funds, the Reserve Bank of India (RBI) on Monday (April 27) announced a special liquidity support of Rs 50,000 crore for mutual funds to tide over the coronavirus COVID-19 crisis.
The new scheme will be effective from Monday (April 27) till May 11, 2020 or up to utilization of the allocated amount, whichever is earlier. The RBI said that it will review the timeline and amount, depending upon market conditions.
The RBI also announced that under this facility, it will give funds to banks at lower rates and banks will be allowed to avail funds for meeting the liquidity requirements of mutual funds.
The RBI has also allowed the banks to extend loans to mutual funds, 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 repo operations of 90 days tenor at the fixed repo rate will be conducted by the RBI. The central bank said that this liquidity facility is on-tap and open-ended and banks will be allowed to avail funding on any day from Monday to Friday (excluding holidays).
The RBI assserted it “remains vigilant and will take whatever steps are necessary to mitigate the economic impact of COVID-19 and preserve financial stability.”
The central bank, however, also noted that at this point of time the high-risk debt mutual fund segment is facing the risk due to coronavirus outbreak.
“The larger industry remains liquid. 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 RBI said.