(Daily News Scan - DNS English) What is Mutual Funds Liquidity Window?
Covid-19 has imposed liquidity strains on MUTUAL FUNDS. With a view to ease the liquidity pressure on Mutual funds, recently, RBI has announced a special liquidity window of Rs 50,000 crore to bail out mutual funds hit by the turmoil in the debt fund segment. The RBI’s liquidity offer is expected to bring some degree of relaxation in the debt market which is under huge redemption pressure, especially in the credit risk fund category which has assets of over Rs 55,000 crore.
In today’s DNS we will talk about liquidity window.
Let us understand liquidity window and how it works-
The RBI is going to conduct repo operations of 90 days tenor at the fixed repo rate. This will be done under the special liquidity facility for mutual funds (SLF-MF).
Funds availed under the SLF-MF will be used by banks exclusively for meeting the liquidity requirements of MFs. The SLF-MF is on-tap and open-ended, and banks can submit their bids to avail the funding till May 11 or up to utilization of the allocated amount.
The banks will be eligible to extend loans to mutual funds and undertake 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.
The RBI has extended this facility keeping in mind the heightened volatility in capital markets in reaction to Covid-19. This has imposed liquidity strains on mutual funds which have intensified in the wake of redemption pressures related to closure of six debt schemes of Franklin Templeton and potential contagious effects.
This move by the RBI primarily aims to assure investors that adequate money available to meet the redemption demands and distressed sales of holdings by mutual funds. However the stress is restricted to the high-risk debt funds segment at this stage while the larger industry remains liquid.
This liquidity offer extended by the RBI is expected to bring some degree of comfort in the debt market which is under huge redemption pressure, especially in the credit risk fund category which has assets of over Rs 55,000 crore. The debt segment has witnessed outflows of Rs 1.94 lakh crore in the month of March.
The RBI says exposures under this facility will not be
calculated under the Large Exposure Framework (LEF), thereby giving greater
comfort for bank to borrow under this window.
The support extended to MFs under the SLF-MF will be exempted from banks’
capital market exposure limits.
The liquidity support held under the SLF-MF will be eligible to be classified as HELD-TO MATURITY.
The face value of securities acquired under the SLF-MF and kept in the HTM category will not be reckoned for computation of adjusted non-food bank credit (ANBC) for the purpose of determining priority sector targets or sub-targets.
Now let us understand few terms.
Mutual Funds – It is basically a common pool of money collected from various investors. The amount collected is then invested on their behalf into stocks, bonds, gold and other similar assets. These funds are managed by money managers or fund managers.
HELD TO MATURITY – These are the securities that companies purchase and intend to keep it until it matures. These are usually debt instruments such as governments or corporate bonds.
