The government is constituting a Rs 33,000 crore ($4 billion) fund to provide liquidity support to its corporate debt market during periods of tension, reported Reuters. An SBI Mutual Fund executive told the news agency that the fund would help stem panic selling and ease redemption pressures.
Deputy managing director of SBI Mutual Fund D P Singh said that the government will provide 90 per cent of the money for the fund, and other asset managers would contribute the rest.
According to the report, SBI Mutual Fund has been tasked with administrating the fund. It was first proposed by the Securities and Exchange Board of India (SEBI) in 2020 after high-profile defaults rocked the domestic debt market. SBI Mutual Fund is a unit of India's largest state-owned PSB, State Bank of India.
"We have seen in the past that whenever there is a credit event, there is a run on the funds for redemption which in turn creates pressure on liquidity...this fund is being created to avoid such a situation in the future and meet the redemption pressure in any such event,” said D P Singh.
The backstop fund can enter the market to purchase relatively illiquid investment-grade bonds during stressful periods, the report added.
Anubhav Shrivastava, partner, Infinity Alternatives, an alternate investment fund (AIF) told Reuters, “This backstop facility fund comes out of Indian market peculiarity that the bonds are investment grade and still illiquid…the market for secondary corporate bonds is thin which is why we need the buyer and seller of last resort, the backstop fund will do this."
Last year, Finance minister Nirmala Sitharaman announced that the government had accepted SEBI's proposal for the fund. She didn’t provide any detail regarding the same.
A source familiar with the plans told Reuters that the fund will be operational within three months. The fund is minor in comparison to the $471 billion ($39 trillion) Indian corporate bond market, but the source indicated that its size might be enhanced in the future.