Call Us Now

+91 9606900005 / 04

For Enquiry

legacyiasacademy@gmail.com

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.
Download PDF
October 2022
MTWTFSS
 12
3456789
10111213141516
17181920212223
24252627282930
31 
Categories