Why in news?
The Reserve Bank of India (RBI) on 27th April, 2020 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 will liquidity window Help?
- 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.
- Funds availed under the SLF-MF will be used by banks exclusively for meeting the liquidity requirements of MFs.
- 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.
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.
- 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.
