RBI shuts special liquidity window for mutual funds

Central bank had opened this window to help mutual funds meet sharp redemptions in fixed income schemes

The Reserve Bank of India said on Tuesday it was closing the special window for banks to meet the cash requirements of mutual funds (MFs).

It had opened this window in mid-July to help MFs meet sharp redemptions in fixed income schemes, after RBI's move to make it more expensive for participants to borrow short-term money triggered panic in the bond markets.

“With the normalisation of exceptional measures and taking into consideration the improvement in liquidity conditions since then, it has been decided to close this window with immediate effect,” said the central bank in its monetary policy review.

The special repo window allowed banks to borrow a total of Rs 25,000 crore at 10.25 per cent for MFs.

Various Mfs initially tapped this facility, as fund managers were selling bonds at losses to meet redemptions, said sector officials. As calm returned to the bond markets, few fund houses needed the facility, they said.

RBI had previously opened such a window for MFs when the global financial crisis deepened in September 2008 after US investment bank Lehman Brothers had collapsed.