The Reserve Bank of India on July 17 created a special Rs 25,000-crore borrowing facility for mutual funds (MFs) to meet their liquidity requirements. This is being done to manage the heavy redemptions that are expected due to sudden losses in debt funds following the tightening of liquidity and the hike in overnight lending rates. This is the second time the central bank has opened such a window for MFs.
RBI had provided a similar liquidity window for MFs during the global financial crisis in 2008. This may (help) tide over the liquidity stress in the markets, said G Pradeepkumar, CEO, Union KBC MF. Panic selling on account of redemptions and subsequent sharp spike in the money market rates are expected to be curtailed, he said. The repo window is likely to reduce the volatility and allow the money markets to settle down.
It would ease the pressure on liquidity and would help in preventing abrupt disruptions (in the market), said Lakshmi Iyer, head, fixed income and products, Kotak Mahindra MF. Short-term interest rates have surged and fund houses have received large redemptions in their liquid and short-term funds, industry officials said. We are seeing huge outflows from liquid funds. A lot of money parked by banks in liquid funds got redeemed on Tuesday, a senior industry official said. The RBI’s monetary tightening has reduced the liquidity in the system, sending yields on debt instruments higher.
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