MUMBAI: The Reserve Bank of India on Monday announced a special liquidity facility of ₹50,000 crores for mutual funds in the wake of the winding up of six debt funds by Franklin Templeton.
“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 effects therefrom. The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid,” RBI said in its press release.
While the majority of fund houses said that the debt schemes are fairly liquid at this point but in the coming weeks if the lockdown is not lifted then managing redemptions would require a credit line from RBI through a dedicated liquidity window.
“This comes as a big comfort factor for mutual funds,” said a debt fund manager.
Banks can avail of 90-day funds from the RBI’s repo window and use it to exclusively lend to mutual funds or purchase investment-grade corporate papers held by MFs. The scheme will be available from 27 April till 11 May.
This comes after Franklin Templeton decided to shut down debt schemes like Low Duration Fund, Dynamic Accrual Fund, Credit Risk Fund, Short Term Income Plan, Ultra Short Bond Fund, and Income Opportunities Fund. The total assets under management (AUM) of these funds are ₹25,000 crores.
As of 23 April, four fund houses had borrowed of ₹4,427.68 crores from banks including Franklin Templeton to manage the redemption pressures, according to of Association of Mutual Funds in India (AMFI).
A similar window was opened by RBI for banks to meet the liquidity requirement of mutual funds in 2008 and 2013. In 2008, the central bank opened a special 14-day repo window of ₹20,000 crores to enable banks to raise money and lend to the funds but received only four bids for ₹3,500 crores.
In 2013, RBI opened a special three-day repo window that allowed banks to borrow a total of ₹25,000 crores at a rate of interest of 10.25% to help mutual funds tide over their liquidity problems. The liquidity window given to mutual funds at that time had calmed the market. It was more of a psychological step,” a retired central banker said on condition of anonymity.