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Indian central bank offers mutual funds lifeline

With the Indian mutual fund industry feeling the strain of redemption and liquidity pressures after the Franklin Templeton fiasco, the central bank has decided to provide a lifeline. The Reserve Bank of India will open a special liquidity window of 500 billion rupees (US$6.56 billion) to ease the pressure on mutual funds.

Mutual funds have been facing liquidity pressures as capital markets have remained volatile since the surge in coronavirus cases across the country, which led to transport curbs and later a complete lockdown from March 25. This has resulted in redemption pressures for mutual fund investors.

Last week, the Indian arm of Franklin Templeton, the American mutual fund giant, decided to close six of its debt funds due to liquidity and redemption pressure, which sparked a panic among retail investors.

Investors, especially institutional players, are becoming risk averse. They are not rolling over their investments and are insisting on repayments. Similarly, those in the corporate sector with investments in debt schemes are also withdrawing to create a war chest for meeting their own liquidity needs.

The central bank has said it will take all necessary steps to ensure the financial stability of mutual funds. It observed that the stress was confined to the high-risk debt MF segment at this stage; the larger industry has sufficient liquidity.

Its rescue package plan will see banks draw funds under the Special Liquidity Facility-Mutual Fund exclusively for meeting the liquidity requirements of mutual funds by extending loans. They can also make outright purchases of investment-grade corporate bonds, commercial papers, debentures and certificates of deposit held by mutual funds.

This is the third time the Reserve Bank has provided liquidity infusions. The other infusions were provided in 2008 after the global financial crisis and then in 2013, but then the credit line was much smaller at 200 billion rupees ($2.62 billion) and 250 billion rupees ($3.28 billion), respectively. This time it is nearly double the 2013 figure.

In 2008, the central bank opened a special 14-day repo window to enable banks to raise money and lend to the funds while in 2013, it had opened a special three-day repo window.

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