RBI announces special liquidity window for mutual funds

It said it would conduct repo operations for 90 days’ tenor at the fixed repo rate and the funds will be available on-tap and open-ended.

After the news, the NSE banking index extended gains to trade nearly 3% higher, while shares of asset managers reversed session losses to trade higher.

HDFC Asset Management Co. rose as much as 6.48%, while Nippon Life India Asset Management Ltd.  jumped as much as 12.7%, its biggest one-day gain since March 2019.

Analysts had mixed views over the success of the move, as banks would not necessarily lend to high-risk funds though the presence of a window would itself help calm investors’ nerves, they said.

“It’s good, hope is retained that the corporate bond market will improve on liquidity and credit spread after 90 days of pay back time of SLF-MF scheme,” said J. Moses Harding, an independent strategist and consultant who was formerly a banker.

“Banks would be seen comfortable to lend to top quartile, similar to non-bank finance companies, but appetite will be low on others from counterparty risk.”

Banks will need to access the funds from the RBI at the repo window and extend loans to mutual funds, buy outright investment grade corporate bonds or commercial papers or certificates of deposits from them or extend the funds against collateral through a repo.