Covid-19: India's Banking Regulator Provides $6.7 Bln Lifeline to Mutual Funds Amid Default Fears

Within days of India's major Mutual Fund Franklin Templeton winding-up six yield-oriented, managed credit funds, the banking regulator Reserve Bank of India (RBI) has provided a $6.7 billion special liquidity fund for the mutual fund sector to deal with the liquidity crisis caused by the Covid-19 pandemic.

“Heightened volatility in capital markets in reaction to Covid-19 has imposed liquidity strains on mutual funds (MFs), which have intensified in the wake of redemption pressures related to closure of some debt MFs and potential contagious effects therefrom. The stress is, however, confined to the high-risk debt MF segment at this stage. The larger industry remains liquid,” the RBI stated on Monday.  

Reacting to RBI's decision, Principal Economic Adviser in the Ministry of Finance Sanjeev Sanyal said on Twitter: "Ministry of Finance & RBI are committed to the smooth functioning of the financial system. We will continue to monitor the situation & will intervene where necessary."

Analysts believe that the banking regulator’s initiative will help alleviate fear among investors.

Joseph Thomas, Head of Research, Emkay Wealth Management, said: “The closure of its six debt schemes by Franklin Templeton has eroded the confidence of investors to a large extent. This usually results in more redemptions and may lead to liquidity problems for the mutual fund industry, when many of them already have negative cash in debt funds.”

“More than a crisis of liquidity, it is a crisis of confidence. In order to bring back confidence, the RBI has announced the liquidity support measures for the mutual funds specifically. This will serve to alleviate the fears in the minds of investors and also dissuade many from getting into redemption mode,” Joseph added.

Joseph added that this is a timely action from the RBI. Last week, Franklin Templeton said it had stopped redemption in six of its schemes due to liquidity issues caused by the COVID-19 crisis, impacting investments worth at least $3.73 billion. Transactions in the schemes have been halted since 24 March.

According to the federal Health and Family Welfare Ministry, a total of 20,835 people have so far tested positive for coronavirus and the death toll has reached 872.