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Under the special liquidity facility scheme effective today, the RBI will conduct repo operations of 90 days tenor at the fixed repo rate. The facility will be on-tap and open-ended, and banks can submit their bids to avail funding on any day from Monday to Friday, RBI said.
Funds availed under the scheme can be used by banks exclusively for meeting the liquidity requirements of MFs by extending loans, and 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.
The central bank’s move has come following Franklin Templeton’s decision to close six debt funds and put redemptions on hold indefinitely
Nimesh Shah, MD and CEO of ICICI Prudential MF said that the confidence among investors will increase following the RBI move.
“The only people need to see is quality of the portfolio. If my portfolio is not of right quality, I would not get liquidity whatever I do. RBI’s move will give a lot of confidence to investors,” Shah said.
In a release, the RBI said: “Heightened volatility in capital markets in reaction to Covid 19 has imposed liquidity strains on mutual funds which have intensified in the wake of redemption pressures related to closure of some debt MFs and potential contagious effects there from”.
The stress the RBI insisted is confined to the high-risk debt MF segment at this stage. The apex bank said the larger industry remains liquid.
The RBI added liquidity support availed under the scheme 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 scheme 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,” RBI said.
Besides, support extended to MFs under the SLF-MF shall be exempted from banks’ capital market exposure limits.
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