BackRBI offers mutual funds a breather, opens liquidity window
RBI’s offering acts as a psychological signal to mitigate investor panic by assuring adequate money to meet redemptionsBanks can borrow 90-day funds from RBI at the current repo rate of 4.4% and use it to on-lend to mutual funds
PremiumMUMBAI : The central bank on Monday opened a ₹ 50,000-crore special credit facility to help mutual funds (MFs) tide over redemption pressures caused by the collapse of six Franklin Templeton funds and prevent panicked investors from withdrawing their money in the midst of a crisis.
The Reserve Bank of India’s move is primarily aimed at assuring investors that adequate money is available to meet redemption demands and to help the asset managers avoid distressed sales of holdings by mutual funds.
Franklin Templeton’s decision to wind up six credit funds for lack of liquidity has prompted fears that investors will rush to withdraw money from debt funds. Credit markets were under pressure even before the covid-19 outbreak in India, but the pandemic and the 40-day lockdown to stem its spread have only intensified the woes.
“Heightened volatility in capital markets in reaction to covid-19 has imposed liquidity strains on mutual funds that 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 mutual fund segment at this stage; the larger industry remains liquid," RBI said in a statement.
Banks can borrow 90-day funds from RBI at the current repo rate of 4.4% and use it to on-lend to mutual funds or purchase investment-grade corporate papers held by them. The scheme will be available from 27 April till 11 May. Banks buying the securities from mutual funds can hold it in their held-to-maturity segment, even if the total investment in that category over-shoots the central bank’s limits. The advantage of the segment is that banks do not have to account for mark-to-market losses in case the bond values fall further.
Mint reported on Friday that RBI could be looking at a special window to help MFs meet redemption pressure. As of 23 April, four asset managers borrowed ₹4,427.68 crore from banks to manage redemption pressure, according to Association of Mutual Funds in India, or Amfi, the mutual fund industry’s self-regulatory body.
“Banks’ lending rate (to MFs) will depend on whether it is an outright purchase or a line of credit and on the quality of the underlying asset being sold or pledged," said Arvind Chari, head of fixed income and alternatives at Quantum Advisors Pvt. Ltd.
The cost of funding will be between 7.5% and 9%, depending on maturities of paper and schemes, said A. Balasubramanian, managing director and chief executive of Aditya Birla Sun life Mutual Fund. “It’s a question of time when banks will increase their lending down the credit curve. RBI has done more than enough to boost liquidity in the corporate bond market and slowly we will see these steps trickling down to help the bond market. It is a big confidence booster," said Balasubramanian.
HDFC Asset Management Co. Ltd gained 5.26%, while Nippon Life India Asset Management Ltd rose 11.4% on Monday.
While RBI’s move helps in boosting confidence, it may not have too much of an impact on debt funds with riskier debt securities in their portfolio. Assuming that redemptions from these debt funds is permanent, banks will have to assume credit risk of these bonds in books. However, banks are likely to offer funding only against collateral where they are comfortable with the risk. Only bonds that meet the banks’ risk averse criteria will benefit from this window, said Chari of Quantum.
In short, this RBI lifeline is available only against securities with investment-grade rating.
The result of the recent targeted long-term repo operations (TLTRO) conducted by RBI has shown that banks have invested only in high-rated debt papers of firms such as Reliance Industries, Housing Development Finance Corp. Ltd, Power Finance Corp. Ltd, Larsen and Toubro Ltd and Mahindra and Mahindra Ltd. TLTRO 2.0, which was opened to meet the liquidity requirement of stressed NBFCs, showed that banks borrowed ₹12,850 crore, a little more than half of the ₹25,000-crore on offer. This is a clear indication of the extent of risk aversion in the credit market, despite RBI’s repeated liquidity injection and deep cuts in benchmark rates.
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