New Delhi: The Reserve Bank of India on Monday announced a special liquidity facility of ₹50,000 crore for mutual funds after Franklin Templeton's decision to wind up of six debt funds left investors jittery.

Why did RBI propose the liquidity window?

“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," RBI said in its press release.

Even as the majority of fund houses have given assurance that the debt funds are fairly liquid at this time but fears loom given the lockdown is not lifted then it will be difficult to manage the redemption pressure and instead look for a credit line from RBI through a dedicated liquidity window.

How will this help the MF industry?

Banks can avail of 90-day funds from the RBI’s repo window and use it to exclusively lend to mutual funds or purchase investment-grade corporate papers held by MFs. The scheme will be available from 27 April till 11 May.

In a move to ease liquidity and safeguard investors' sentiments, the central bank said that it will review the timeline and amount, depending upon market conditions.

Under this window, the RBI will provide funds to banks at a lower rate which banks can avail funds for exclusively meeting the liquidity requirements of mutual funds.

Analysts had expected that RBI may be opening this special window to help MFs handle the redemption pressure. The sentiments of debt mutual fund investors were marred on Friday after Franklin Templeton decided to shut down debt schemes like Low Duration Fund, Dynamic Accrual Fund, Credit Risk Fund, Short Term Income Plan, Ultra Short Bond Fund and Income Opportunities Fund. The total assets under management (AUM) of these funds is estimated at ₹25,000 crore.

As of 23 April, four fund houses had borrowed of ₹4,427.68 crores from banks including Franklin Templeton to manage the redemption pressures, according to Association of Mutual Funds in India (AMFI).

When did RBI take similar measures?

In a similar action earlier in 2008 and 2013, RBI has opened up credit for banks to meet the liquidity requirement of mutual funds. In 2008, the central bank opened a special 14-day repo window of ₹20,000 crore to help banks raise money for further lending to the funds. However, it could manage four bids for ₹3,500 crore.