The Reserve Bank of India on Monday announced a Rs 50,000-crore Special Liquidity Facility for mutual funds, four days after Franklin Templeton Mutual Fund shut six debt schemes in India amid the coronavirus crisis.
The RBI, in a press release, said it took the step because “heightened volatility in capital markets in reaction to Covid-19 has imposed liquidity strains on mutual funds”. The central bank added that redemption pressures related to closure of some debt mutual funds intensified some of these liquidity strains.
However, the RBI added that at this stage, the stress is confined only to the high-risk debt mutual fund segment, and the “larger industry remains liquid”.
“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,” read the press release. “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 that the scheme is available from Monday till May 11 or up to utilisation of the allocated amount, whichever is earlier. The bank said it will review the timeline and amount of the scheme depending on market conditions.
“Under the SLF-MF [Special Liquidity Fund-Mutual Fund], the RBI shall conduct repo operations of 90 days tenor at the fixed repo rate,” the press release added. “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.”
Banks will use the funds availed under the scheme for meeting the liquidity requirements of mutual funds by extending loans, and by undertaking outright purchase against the collateral of investment grade corporate bonds, commercial papers etc, the press release said.
The six high-risk, high-return credit funds that Franklin Templeton wound down are the Franklin India low duration fund, the Franklin India dynamic accrual fund, the Franklin India credit risk fund, the Franklin India short term income plan, the Franklin India ultra short bond fund and the Franklin India income opportunities fund. Investors will not be able to withdraw their amounts immediately – they will have to wait for as long as the scheme’s original duration.
India’s debt markets have been under stress since the government imposed the lockdown to combat the spread of the coronavirus. Covid-19 has infected more than 27,800 people in India so far and led to the deaths of 872 people.