Key Highlights of RBI Liquidity Support to Mutual Funds due to COVID-19 By CS Lalit Rajput

RBI Announces Rs. 50,000 crore Special Liquidity Facility for

RESERVE BANK OF INDIA, vide press release 2019-2020/2276  dated 27th April, 2020 has Announces Rs. 50,000 crore Special Liquidity Facility for Mutual Funds (SLF-MF) In view of the situation arising due to COVID-19 pandemic and extended lockdown period.

Why RBI Announces such Measure:

  • Heightened volatility in capital markets
  • liquidity strains on mutual funds (MFs),
  • redemption pressures related to closure of some debt MFs
  • potential contagious effects
  • to mitigate the economic impact of COVID-19 and preserve financial stability

Scheme Applicability:

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.

Key Highlights:

  • 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
  • Under the SLF-MF, the RBI shall conduct repo operations of 90 days tenor at the fixed repo rate
  • banks can submit their bids to avail funding on any day from Monday to Friday (excluding holidays).
  • The Reserve Bank will review the timeline and amount, depending upon market conditions.
  • Liquidity support would be eligible to be classified as held to maturity (HTM) even in excess of 25% of total investment permitted to be included in the HTM portfolio.

Note: Support extended to MFs under the SLF-MF shall be exempted from banks’ capital market exposure limits.

Utilization of Funds

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

How to Avail Benefits:

  • This special repo window will be available to all LAF eligible banks and can be availed only for on-lending to Mutual funds
  • The eligible banks may place their bids electronically on the CBS platform between 9 AM and 12.00 Noon every day
  • The bidding process, settlement and reversal of SLF-MF repo would be similar to the existing system being followed in case of LAF/MSF.
  • In case of over-subscription of the notified amount on any given day, the allotment will be done on pro-rata basis.
  • The minimum bid amount would be Rupees one crore and multiples thereof. The allotment would be in multiples of Rupees one crore.
  • A market participant can place bids of amount less than or equal to the notified amount of the issue announced on a given day.
  • The eligible collateral and the applicable haircuts will remain the same as applicable for LAF.

Note: While banks will decide the tenor of lending to /repo with mutual funds,  the minimum tenor of repo with RBI will be for a period of three months.


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