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Why has the Reserve Bank of India opened a liquidity window for mutual...

  May 09, 2020

Why has the Reserve Bank of India opened a liquidity window for mutual funds? What are the concerns about the industry?

  1. The trigger for the RBI’s liquidity window was Franklin Templeton Mutual Fund’s decision to wind up six debt funds that had a combined assets under management (AUM) of almost ₹26,000 crore. 
  2. That led to fears that the debt funds of many other fund houses could face such a crisis and people started withdrawing money.
  3. While the mutual fund industry clarified that what had happened at Franklin Templeton Mutual Fund was an isolated case, wider liquidity and other concerns persist. 
  4. A couple of fund houses have already seen huge erosion in the net asset values of a few debt schemes post the Franklin Templeton episode due to mark-downs of their holdings. 
  5. Incidentally, till date, banks have borrowed about ₹2,000 crore through the RBI liquidity window for mutual funds. 
  6. The regulators are aware of the potential risk and are monitoring the situation closely. 
  7. Market participants have already written to the Securities and Exchange Board of India (SEBI) to take action against Franklin Templeton Mutual Fund including appointing a high-powered committee to take over the management of the fund house while examining its investment decisions.