RBI’s move will calm panic, for now

The decision of the Reserve Bank of India (RBI) to provide a Rs 50,000 crore special liquidity facility for mutual funds is intended to allay fears about the strength and stability of an important area of investment for people. Many forms and instruments of investment and savings are under pressure now after the lockdown to contain coronavirus has badly hit economic and financial activities. Trust in stock exchanges and mutual funds needs to be affirmed and strengthened in these difficult times because large investments have been made in them. The RBI took the decision as a confidence-boosting measure in the wake of last week’s announcement by Franklin Templeton Mutual Fund that it was closing six mutual funds. This had the potential to trigger a large-scale exit from mutual funds. The RBI’s assurance of adequate liquidity may set at rest those fears. The RBI decision comes on top of an earlier assurance made by the Association of Mutual Funds in India (AMFI) that there is no liquidity crunch in the industry.

The RBI has said that banks can borrow up to Rs 50,000 crore from it in the next 90 days to lend to mutual fund managers that need funds. Banks will only gain from this, and they have been offered some incentives also to utilise the facility. They can also use the money to buy corporate bonds, commercial papers or deposit certificates from the mutual funds. But there is still some uncertainty about whether banks will utilise the facility. They have been averse to lending money to industry, financial institutions or any other borrower for fear that the money will turn into NPAs. They have safely parked their money with the RBI instead of lending it even at higher rates of interest as they are in no mood to take risks.

This is the third instalment of the RBI’s financial stimulus measures in recent weeks. It has made timely and necessary interventions to boost credit availability and liquidity, to support and strengthen financial institutions, to ensure the smooth functioning of the system and to boost the confidence of all stakeholders, including the common people. But considering the uncertainties involved in the situation, these initiatives, including the latest decision, may not lead to the expected results. The central bank’s proactive stance and actions are in stark contrast with the failure of the government to take any meaningful measures to rescue, much less stimulate, the economy, which was already weak before the pandemic, and has been further weakened now.