Today as on 27.04.2020
RBI Announces `50,000 crore Special Liquidity Facility for Mutual Funds (SLF-MF)
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.
2. The RBI has stated that it remains vigilant and will take whatever steps are necessary to mitigate the economic impact of COVID-19 and preserve financial stability. With a view to easing liquidity pressures on MFs, it has been decided to open a special liquidity facility for mutual funds of ` 50, 000 crore.
3. Under the SLF-MF, the RBI shall conduct repo operations of 90 days tenor at the fixed repo rate. The SLF-MF is on-tap and open-ended, and banks can submit their bids to avail funding on any day from Monday to Friday (excluding holidays). The scheme is available from today i.e., April 27, 2020 till May 11, 2020 or up to utilization of the allocated amount, whichever is earlier. The Reserve Bank will review the timeline and amount, depending upon market conditions.
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4. Funds availed under the SLF-MF shall be used by banks exclusively for meeting the liquidity requirements of MFs by (1) extending loans, and (2) undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs.
5. Liquidity support availed under the SLF-MF would be eligible to be classified as held to maturity (HTM) even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio. Exposures under this facility will not be reckoned under the Large Exposure Framework (LEF). The face value of securities acquired under the SLF-MF and kept in the HTM category will not be reckoned for computation of adjusted non-food bank credit (ANBC) for the purpose of determining priority sector targets/sub-targets. Support extended to MFs under the SLF-MF shall be exempted from banks’ capital market exposure limits.
What RBI’s Rs 50,000 crs boost means for mutual funds..
1. What is this special liquidity facility for mutual funds?
The Reserve Bank of India announced today that it will open a Rs 50,000-crs special liquidity facility for mutual funds (SLF-MF) to ease the liquidity pressure on them.
2. Why were mutual funds facing a liquidity crisis?
Mutual funds were facing a lot of redemption requests after Franklin Templeton Mutual Fund suddenly shut six of its debt mutual fund schemes on Friday. They are unable to sell some of their investments in the debt market due to poor liquidity. In other words, there are no buyers for lower rated instruments. If mutual funds have to sell them, they will be forced to sell it at a steeply lower price. It will result in sharp fall in the net asset values or NAVs of schemes.
3. Why are there no takers for lower rated papers?
Covid-19 crisis is fuelling risk aversion in the markets, especially in the debt market. Everybody wants to play it safe. There are only buyers for top-rated papers and government bonds. Nobody wants to buy lower-rated papers for higher yields because they know they won't be able to sell them if they want to raise money immediately.
4. How will this be solved by RBI SLF-MF?
According to RBI, banks can use funds availed under the SLF-MF exclusively for meeting the liquidity requirements of MFs by(1) extending loans(2) undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs.This means if mutual funds are unable to sell their bonds in the market, they can use this facility to meet redemption requests from investors.
5. How will it benefit investors?
As said earlier, the special window would ease the pressure on mutual funds to sell their investments at a huge discount to meet redemptions. If they are unable to sell their holdings at a fair price in the market, they can use the special window to meet redemptions.
6. Why are debt fund managers elated?
Debt fund managers believe that the RBI move would soothe the nerves of investors rattled by the Franklin Templeton Mutual Fund episode and stop knee-jerk selling decisions by them. Also, they are taking huge comfort from the RBI commitment. RBI said it is committed to take whatever steps necessary to mitigate the economic impact of Covid-19 and preserve financial stability.
RBI Announces `50,000 crore Special Liquidity Facility for Mutual Funds (SLF-MF)
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.
2. The RBI has stated that it remains vigilant and will take whatever steps are necessary to mitigate the economic impact of COVID-19 and preserve financial stability. With a view to easing liquidity pressures on MFs, it has been decided to open a special liquidity facility for mutual funds of ` 50, 000 crore.
3. Under the SLF-MF, the RBI shall conduct repo operations of 90 days tenor at the fixed repo rate. The SLF-MF is on-tap and open-ended, and banks can submit their bids to avail funding on any day from Monday to Friday (excluding holidays). The scheme is available from today i.e., April 27, 2020 till May 11, 2020 or up to utilization of the allocated amount, whichever is earlier. The Reserve Bank will review the timeline and amount, depending upon market conditions.
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4. Funds availed under the SLF-MF shall be used by banks exclusively for meeting the liquidity requirements of MFs by (1) extending loans, and (2) undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs.
5. Liquidity support availed under the SLF-MF would be eligible to be classified as held to maturity (HTM) even in excess of 25 per cent of total investment permitted to be included in the HTM portfolio. Exposures under this facility will not be reckoned under the Large Exposure Framework (LEF). The face value of securities acquired under the SLF-MF and kept in the HTM category will not be reckoned for computation of adjusted non-food bank credit (ANBC) for the purpose of determining priority sector targets/sub-targets. Support extended to MFs under the SLF-MF shall be exempted from banks’ capital market exposure limits.
What RBI’s Rs 50,000 crs boost means for mutual funds..
1. What is this special liquidity facility for mutual funds?
The Reserve Bank of India announced today that it will open a Rs 50,000-crs special liquidity facility for mutual funds (SLF-MF) to ease the liquidity pressure on them.
2. Why were mutual funds facing a liquidity crisis?
Mutual funds were facing a lot of redemption requests after Franklin Templeton Mutual Fund suddenly shut six of its debt mutual fund schemes on Friday. They are unable to sell some of their investments in the debt market due to poor liquidity. In other words, there are no buyers for lower rated instruments. If mutual funds have to sell them, they will be forced to sell it at a steeply lower price. It will result in sharp fall in the net asset values or NAVs of schemes.
3. Why are there no takers for lower rated papers?
Covid-19 crisis is fuelling risk aversion in the markets, especially in the debt market. Everybody wants to play it safe. There are only buyers for top-rated papers and government bonds. Nobody wants to buy lower-rated papers for higher yields because they know they won't be able to sell them if they want to raise money immediately.
4. How will this be solved by RBI SLF-MF?
According to RBI, banks can use funds availed under the SLF-MF exclusively for meeting the liquidity requirements of MFs by(1) extending loans(2) undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs.This means if mutual funds are unable to sell their bonds in the market, they can use this facility to meet redemption requests from investors.
5. How will it benefit investors?
As said earlier, the special window would ease the pressure on mutual funds to sell their investments at a huge discount to meet redemptions. If they are unable to sell their holdings at a fair price in the market, they can use the special window to meet redemptions.
6. Why are debt fund managers elated?
Debt fund managers believe that the RBI move would soothe the nerves of investors rattled by the Franklin Templeton Mutual Fund episode and stop knee-jerk selling decisions by them. Also, they are taking huge comfort from the RBI commitment. RBI said it is committed to take whatever steps necessary to mitigate the economic impact of Covid-19 and preserve financial stability.
