The liquidity initiative to the mutual fund industry also aims to support them after Franklin Templeton fund house halted withdrawals from six debt fund schemes last week.
"Heightened volatility in capital markets in reaction to the 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 statement by India's Reserve Bank of India (RBI) said.
Banks can lend these funds under liquidity initiative to mutual funds by extending loans, and undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs), the statement said.
"In light of Franklin Templeton MF closing six debt funds schemes last week, debt markets were on the edge especially with higher yields on Friday for lower-rated papers. As expected, RBI's liquidity initiative announced Monday will ease pressure and help mutual funds to finance the redemptions using this facility rather than selling exiting papers at a discount and denting its Net Asset Value. We believe that this measure will stabilize the performance of short-term debt funds and improve investor sentiment about the debt market," said Amit Singh, chief executive officer of Investica, an online platform for investing in mutual funds.
As of March 31, 2020, Indian mutual fund industry had assets under management worth 324.9 billion U.S. dollars, of which the debt fund schemes constitute around 20 percent of the total asset under management, industry sources said.
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