RBI Saves the Day with Rs. 50,000 Rescue Plan for Mutual Funds

Once again the Reserve Bank of India (RBI) steps into saving the day with exemplary Rs. 50,000 crore rescue plan to save Mutual Funds on 27th April 2020. This big move came after Franklin Templeton wound up 6 of its debt and credit schemes with an aggregate of Rs. 36,000 crores in Asset Under Management (AUM).

The RBI said that the increased Volatility in the Market due to the outbreak of Coronavirus has laid immense pressure on liquid mutual funds. In a notification released by the RBI, it was said that the stress was confined to high-risk debt mutual fund segment at the current stage. The larger Industry still remains liquid.

As soon as the Facility was made available, the Indian stock markets surged and the Sensex was up by 750 points. Markets declared that the equity benchmark indices were trading on the high and the Nifty50 index claimed 9300 markets. It was also noticed that the Asian currencies were trading stronger against USD.

Main Highlights of RBI’s Big Move

1. Decision to ease liquidity pressure

In the statement released by the RBI, it was said that to ease liquidity pressure on Mutual Funds the decision to open up a special liquidity facility for mutual funds was taken.

2. Repo operations to continue at a fixed rate

It further mentioned that under the special liquidity facility for mutual funds (SLF-MF) the RBI will conduct repo operations of 90 days at the fixed repo rate.

3. Banks allowed to submit bids on weekdays

Furthermore, SLF-MF is on-tap and open-ended and banks are allowed to submit their bids availing funding from Monday to Friday except on holidays.

4. Scheme made available till May 11

Moreover, RBI has made the scheme available from Monday i.e. April 27, 2020, to May 11, 2020, or up to the utilization of the allocated amount.

5. Regular review

It also said that it will monitor and review the time period and amount based on market conditions.

6. Banks can extend loans

Banks can extend loans to mutual funds. This will help in maintaining a good balance in the Economy.

7. Banks can undertake purchases

Banks can also undertake the outright purchase of and/or repo against the Collateral of investment-grade corporate Bonds, commercial papers (CPs), Debentures and certificates of deposit (CD) held by mutual funds.

8. Liquidity support can be classified as held to maturity

RBI mentioned that the liquidity support availed under SLF-MF would be eligible to be classified as Held to Maturity even in excess of 25% of total investment permitted to be included in the held to maturity Portfolio.

9. Special facility restraints

RBI also mentioned that exposure under this special facility will not be under the Large Exposure Framework.

Conclusion

This big move by the Reserve Bank of India (RBI) will prove beneficial for the dipping stock market in the long-run. The stock market has already witnessed a surge within a few hours of the release of the special facility. Stock markets maintain a balance in the economy and this move is a big boon for the health of the economy amid the novel pandemic.