Mumbai: India’s mutual funds have asked the central bank to lend them short-term cash via a repurchase facility after the global financial crisis virtually paralysed the country’s money markets, fund executives said.

The Reserve Bank of India is considering the proposal to let mutual funds deposit some of the short-term bank debt they hold with it in exchange for cash, said four senior executives, who are involved in talks with the central bank and declined to be named.

Central bank repurchase facilities are normally only open to banks and primary dealers. The central bank’s spokeswoman said she could not immediately comment.

Mutual funds would normally sell bank debt on the money market to raise cash to meet redemptions, which should have risen in September as customers pulled out money for quarterly tax payments.

But Indian money markets have been hit by the global financial crisis, which has wrecked banks across the US and Europe and made lenders around the world wary of dealing with each other.

The cost of overnight borrowing on the inter-bank market jumped to a 19-month high of 23% on Friday, more than double the central bank’s short-term lending rate of 9%.

The central bank has tried to ease the liquidity squeeze and the executives said it would only agree to the mutual funds’ request if the money markets failed to thaw.

The central bank lowered the proportion of deposits banks must keep in their vaults by 150 basis points from Saturday, adding Rs600 billion ($12.4 billion) to the amount of cash available for lending.

One basis point is one-hundredth of a percentage point

Market regulator Securities and Exchange Board of India has asked mutual funds to give details of their holdings of certificates of deposits, or CDs that are short-term debt sold by banks. This data would be used by the RBI to assess the request for access to the repo facility, the executives said.

CD issuance has ballooned this year as banks scrambled to raise funds to feed demand for credit. Central bank data shows outstanding CDs at the end of August totalled Rs1.71 trillion, up nearly 40% from the start of the year.

But appetite for CDs is waning and cost of borrowing for three months by selling CDs has jumped to 14% compared with between 10-11% a month earlier, two money market dealers said on Saturday.

That spells trouble for mutual funds at a time of rising redemptions. Customers pulled a net Rs43 billion out of liquid mutual funds in August after investing a net Rs630 million the previous month, according to the Association of Mutual Funds in India. The association has yet to release figures for September, when withdrawals typically rise due to quarterly tax payments.