RBI to open Rs 50,000-cr special liquidity window to support mutual funds

The liquidity strains have intensified in the wake of redemption pressures related to closure of some debt MFs and potential contagious effects

The Reserve Bank of India (RBI) will open a special liquidity window of Rs 50,000 crore to ease pressure on mutual funds, which are facing liquidity strains due to heightened volatility in capital markets in the wake of the Covid-19 outbreak.

The liquidity strains have intensified amid redemption pressures related to the closure of some debt MFs and potential contagious effects. The stress was, however, confined to the high-risk debt MF segment at this stage; the larger industry remained liquid, RBI said in a statement on Monday.

Banks will draw funds under the Special Liquidity Facility-Mutual Fund (SLF) exclusively for meeting the liquidity requirements of MFs by extending loans. Bank could also make outright purchase of investment-grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs.

The RBI stated that it remained vigilant and would take whatever steps were necessary to mitigate the economic impact of Covid-19 and preserve financial stability.

Under the SLF-MF, the RBI would conduct repo operations of 90-days tenor at fixed repo rate. The SLF-MF is on-tap and open-ended, and banks can submit their bids to avail of funding on any day from Monday to Friday (excluding holidays).

The scheme is available from today (April 27, 2020) till May 11, 2020, or up to utilisation of the allocated amount, whichever is earlier. The RBI would review the timeline and amount depending on market conditions.

The RBI said liquidity support availed of under the SLF-MF would be eligible to be classified as held to maturity (HTM), even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio. Exposure under this facility would not be reckoned under the Large Exposure Framework (LEF).

The face value of securities acquired under the SLF-MF and kept in the HTM category would not be reckoned for computation of adjusted non-food bank credit (ANBC) for determining priority-sector targets/sub-targets. Support extended to MFs under the SLF-MF shall be exempted from banks’ capital market exposure limits.