RBI announces special liquidity facility of Rs 50,000 crore for mutual funds amid coronavirus, Franklin Templeton crisis

The Reserve Bank of India (RBI) will provide Rs 50,000 crore to banks at lower interest rates, which can, in turn, extend these to mutual funds that have been facing liquidity strains due to heightened volatility in the financial markets and intensified redemption pressures after Franklin Templeton closed six debt mutual funds last week.

The move comes after the mutual funds approached the Finance Ministry and Niti Aayog for steps to address the crisis. Liquidity in the bond market has dried up in the wake of COVID-19 pandemic, putting pressure on their yields. This, in turn, has been eroding the ability of companies to service their debt. Mutual funds have also been getting a lot of redemption requests.

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The RBI's liquidity facility for mutual funds will be effective from today till May 11, 2020, or up to utilization of the allocated amount, whichever is earlier.

For this, the RBI will conduct repo operations of 90 days tenor at the fixed repo rate.

This liquidity facility is on-tap and open-ended, and banks can submit their bids to avail funding on any day from Monday to Friday (excluding holidays).

"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 the closure of some debt MFs and potential contagious effects therefrom," the RBI said in a statement.

Last week, Franklin Templeton Mutual Fund shuttered six of its open-ended debt funds, effective April 23.

The RBI also assured that it will review the timeline and amount, depending upon market conditions. It, however, said that stress is confined to the high-risk debt mutual fund segment at this stage.

"I welcome the RBI’s announcement of a Rs 50,000 crore special liquidity facility for Mutual Funds. I am glad that RBI has taken note of the concerns expressed two days ago and requesting prompt action," said P Chidambaram.