Key Reasons For RBI Announcement of Special Liquidity Facility
- Covid 19 has increased volatility in Capital market resulting in liquidity crisis in Mutual funds.
- Credit Risk in debt schemes with low quality paper resulting in non meeting of redemption pressure.
- To avert the Franklin Templeton type crisis and bring stability in Mutual Fund industry.
- To calm investors nerves on this unprecedented event.
Today RBI has announced Special liquidity window of Rs 50000 crore to meet the redemption pressure in Mutual fund industry. That has resulted in closure of Franklin Templeton’s 6 Debt schemes. As the company is unable to bear high redemption pressure on the back of liquidity crunch prevailing in the economy.
Covid 19 has deteriorated the financial position of the issuers of debt instruments. This has added high credit risk into the system. There are no buyers available for low quality debt papers.
That is why the Franklin Templeton announced this decision and closed 6 schemes on 23rd April 2020. This has scared the investors and increased the financial instability in the system.
To address this problem, RBI has announced this window.
RBI Announcement of Rs 50000 Crore Through Special Liquidity Facility
RBI in its press release announced that:
” The banks can avail funding on any day from Monday to Friday (excluding holidays) at Fixed Repo Rate. 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”