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Thursday, May 28, 2020

Explained: What RBI’s Rs 50,000 crore boost means for mutual funds

The RBI’s liquidity offer is expected to bring some degree of comfort in the debt market which is under huge redemption pressure, especially in the credit risk fund category which has assets of over Rs 55,000 crore.

By: Express News Service , Edited by Explained Desk | Mumbai | Updated: April 28, 2020 7:00:56 pm
Explained: Why RBI is aligning accounting year with fiscal year Banks can extend loans to mutual funds and undertake the 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 MFs.

The Reserve Bank of India (RBI) on Monday announced a special liquidity window of Rs 50, 000 crore to bail out mutual funds hit by the turmoil in the debt fund segment that led to the closure of six credit risk funds by Franklin Templeton Mutual Fund.

How does liquidity window work?

Under the special liquidity facility for mutual funds (SLF-MF), the RBI will conduct repo operations of 90 days tenor at the fixed repo rate. The SLF-MF is on-tap and open-ended, and banks can submit their bids to avail the funding till May 11 or up to utilization of the allocated amount, whichever is earlier. Funds availed under the SLF-MF will be used by banks exclusively for meeting the liquidity requirements of MFs.

What will banks do with this money?

Banks can extend loans to mutual funds and undertake the 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 MFs.

READ | UK Sinha writes: Mutual fund problem can swiftly migrate to financial services, then spread soon to real economy

Why has the RBI offered this facility?

Heightened volatility in capital markets in reaction to Covid-19 has imposed liquidity strains on mutual funds which have intensified in the wake of redemption pressures related to closure of six debt schemes of Franklin Templeton and potential contagious effects. The stress is, however, confined to the high-risk debt funds segment at this stage while the larger industry remains liquid.

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What will be the impact?

The RBI’s liquidity offer is expected to bring some degree of comfort in the debt market which is under huge redemption pressure, especially in the credit risk fund category which has assets of over Rs 55,000 crore. The debt segment has witnessed outflows of Rs 1.94 lakh crore in the month of March.

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What are the features of the offer?

The RBI says exposures under this facility will not be reckoned under the Large Exposure Framework (LEF), thereby giving greater comfort for bank to borrow under this window. The face value of securities acquired under the SLF-MF 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 or sub-targets. The support extended to MFs under the SLF-MF will be exempted from banks’ capital market exposure limits.

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