RBI Announces Rs 50,000 Crore Liquidity Facility for Mutual Funds

The stress is confined to the high-risk debt MF segment at this stage, the RBI said.

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The Reserve Bank of India on Monday, 27 April announced a Rs 50,000 crore special liquidity facility for mutual fund, days after Franklin Templeton Mutual Fund decided to close six debt schemes.

In a statement, the central bank said heightened volatility in capital markets in reaction to COVID-19 has imposed liquidity strains on mutual funds (MFs), which have intensified in the wake of redemption pressures related to closure of some debt MFs and potential contagious effects therefrom.

The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid, it said.

“With a view to easing liquidity pressures on MFs, it has been decided to open a special liquidity facility for mutual funds of Rs 50,000 crore,” it said.

The Reserve Bank of India (RBI) also stressed it remains vigilant and will take whatever steps are necessary to mitigate the economic impact of COVID-19 and preserve financial stability.

Chidambaram Lauds RBI

Former Finance Minister P Chidambaram on Monday, 27 April lauded the RBI's prompt action. “I welcome the RBI's announcement of a Rs 50,000 crore special liquidity facility for Mutual Funds. I am glad that RBI has taken note of the concerns expressed two days ago and requesting prompt action,” the Congress leader said on Twitter.

Chidambaram had on Saturday, 25 April expressed "grave concern" for investors over Franklin Templeton Mutual Fund's decision to wind up six debt schemes and urged the government to act promptly to resolve the issue.

Franklin Templeton Mutual Fund voluntarily decided to wind up its six debt schemes citing redemption pressure and lack of liquidity in bond markets due to the coronavirus pandemic.

BJP President Nadda Welcomes Decision

BJP president J P Nadda on Monday said the RBI's announcement will take forward the Union government's measures to protect small investors amid the challenges facing the economy due to COVID-19.

“COVID-19 has brought many challenges to our economy. To deal with this, the PM Narendra Modi government has taken many prompt decisions. Taking it forward and to protect small investors interests, I welcome the RBI’s announcement of Rs 50,000 crore special liquidity facility for mutual funds,” Nadda said.

The ruling Bharatiya Janata Party (BJP) said on its Twitter handle that the measure will stabilise the performance of short-term debt funds and improve investor sentiment about the debt market.