RBI to open special liquidity facility for mutual funds
The apex bank of India, RBI today announced a special liquidity facility for mutual funds of Rs 50,000 crore. This was necessitated due to the heightened volatility and redemption, post winding up of six debt mutual funds by Franklin Templeton India on April 24, 2020. The closing down of the funds had the potential of contagion impact as other debt funds from different fund houses might have faced the same amplified redemption. This act of RBI will help to ease any liquidity issue faced by the fund houses.
According to the announcement, RBI has decided to open a special liquidity facility for mutual funds of Rs 50,000 crore. The scheme is available from today i.e. April 27 till May 11, 2020, or up to utilisation of the allocated amount, whichever is earlier. It will review the timeline and amount, depending upon the market conditions.
Our assessment shows that the amount is sufficient to ease the liquidity pressure that the mutual fund houses are facing on the back of COVID-19 and its subsequent lockdown. Debt funds, which are holding the majority of the papers rated below AAA, are witnessing a higher redemption. The total asset under management of such funds is around Rs 50,000 crore. The experience of such liquidity issues faced by the industry earlier such as in 2008-09 and 2013, saw a similar line of action by RBI however, the liquidity provided by the RBI was not fully utilised. This means that more than anything, this announcement will help to rebuild confidence among MF investors.
Meanwhile, RBI has announced that ‘funds availed under SLF-MF shall be used by banks exclusively for meeting the liquidity requirements of MFs by (1) extending loans and (2) undertaking 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.
We believe that there is a current temporary dislocation in the asset prices due to COVID-19 and investors who do not need liquidity, should not be in a hurry to redeem.