RBI's Rs 50,000 Crore Boost For Mutual Funds, Days After Franklin Templeton Mess: 10 Points

Mutual Funds: The RBI cited heightened volatility in capital markets in reaction to the coronavirus (COVID-19) pandemic, which has imposed liquidity strains on MFs.

RBI On Mutual Funds: The RBI said there is heightened volatility in the capital markets

The Reserve Bank of India (RBI) on Monday announced a special liquidity facility worth Rs 50,000 crore for mutual funds in a bid to ease liquidity pressures in the sector as well as lift investors' confidence, days after the US-based Franklin Templeton wound up six of its India funds. The central bank cited heightened volatility in capital markets in reaction to the coronavirus (COVID-19) pandemic, which it said has imposed liquidity strains on mutual funds. Banking and financial services stocks registered sharp gains in morning deals. Analysts say the RBI move will help mutual funds tide over a severe liquidity strain imposed by the coronavirus pandemic.

Here are 10 things to know about this story:

  1. The RBI said it will conduct repo operations of 90-days tenor at the fixed repo rate. Banks will need to access the funds from the RBI at the repo window. The scheme will be available immediately till May 11 or up to utilization of the allocated amount, whichever earlier. The central bank said it will review the timeline and amount depending upon market conditions.

  2. Financial stocks cheered the announcement. The Nifty Bank index - comprising shares in 12 major lenders in the country - rose as much as 3.21 per cent in the first half of the session, with all its components enjoying gains.

  3. The RBI said liquidity strains have "intensified in the wake of redemption pressures related to closure of some debt MFs (mutual funds) and potential contagious effects therefrom". However, the RBI said, the stress is confined to high-risk debt mutual funds at this stage while the larger industry remains liquid.

  4. Last week, Franklin Templeton Mutual Fund announced its decision to wind up six yield-oriented, managed credit funds in the country effective April 23, citing severe market dislocation and illiquidity caused by the coronavirus. (Read: Franklin Templeton Shuts 6 India Funds)

  5. That forced many fund houses to take steps aimed at reassuring their investors amid fears of a flood of redemption requests, as the closures sparked worries of panic withdrawals.

  6. “This is more of a confidence-boosting measure. Most debt MFs invest in AA or higher rated paper and A or below is a very small part of their portfolios. There is enough liquidity in the market for a good quality paper," said Ashish Shanker, head of investments at Motilal Oswal Private Wealth Management. "This should help settle some of the panics that was caused over the weekend over the Franklin Templeton news." 

  7. With assets worth more than Rs 86,000 crore as of the end of March, Franklin Templeton is the ninth largest mutual fund in the country, having set up shop over two decades ago. Franklin Templeton was long known for its focus on lower-rated papers such as "AA" and "A", and in turn higher yields for its investors.

  8. Former finance minister P Chidambaram welcomed the RBI's move. "I am glad that RBI has taken note of the concerns expressed two days ago and requesting prompt action," he said on Twitter.

  9. The RBI reiterated that it remains vigilant and will take any steps necessary to mitigate the economic impact of COVID-19 and preserve financial stability. The government has extended the biggest lockdown in the world to curb the spread of the coronavirus outbreak, according to official data. 

  10. It has so far announced a spending package of Rs 1.7 lakh crore, whereas the central bank has cut key interest rates, and brought in targeted long-term repo operations to ease liquidity in the system. India has reported 26,496 infections and 824 deaths due to the COVID-19 disease.