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SIGNALLING SUPPORT: ON RBI RELIEF FOR MUTUAL FUNDS

Why in news?

  • The Reserve Bank of India’s decision to open a special facility to ensure the availability of adequate liquidity for the mutual fund industry is a timely move in signalling to investors that the central bank is alert to the need to preserve financial stability in these challenging times.
  • In assigning ₹50,000 crore exclusively for commercial banks to lend to mutual funds, the RBI made clear on 27th April that it wants to tamp down on any build-up of liquidity strains at mutual fund houses in the wake of heightened volatility in the capital markets and increased redemption pressures as a fallout of the COVID-19 pandemic.

Concerns and addressing them

  • There are concerns about the banking industry’s willingness to expose itself to the credit risk involved in making fresh loans.
  • Taking this into account RBI’s norms have been tailor-made to incentivise the banks to lend.
  • If the recent experience of getting lenders to support NBFCs through a targeted long-term repo operation backed by ₹50,000 crore is any pointer, clearly the banking industry – appears to have little interest in adding any credit that it deems risky.
  • With the economy still in lockdown and the credit ratings of even relatively well-established companies facing a real and not-too-distant threat of downgrades. How willing banks would be to use this facility to lend to debt mutual funds remains to be seen.
  • The Centre may need to be ready to step in with direct intervention if the RBI’s gambit fails to ease the pressure on mutual funds.
January 2023
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