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RBI steps in to ease MFs redemption pressure

MUMBAI: The Reserve Bank of India (RBI) on Tuesday announced measures to infuse Rs. 20,000 crore through the short-term lending route for mutual funds to meet their liquidity needs and redemption pressure.

Last week, the RBI cut the Cash Reserve Ratio by 150 basis points to provide Rs. 60,000 crore to the banking system.

“RBI has decided to conduct a special 14-day repo at 9 per cent per annum for a notified amount of Rs. 20,000 crore on Tuesday with a view to enabling banks to meet the liquidity requirements of mutual funds,” RBI stated in a notification. The reversal will take place on October 29.

This repo will be in addition to the repo/reverse repo auctions conducted under Liquidity Adjustment Facility (LAF) and Second Liquidity Adjustment Facility (SLAF) which will be held as usual.

The settlement for the special repo would be conducted separately and on gross basis.

The annual policy Statement for 2008-09 and the subsequent First Quarter Review had reiterated that the Reserve Bank retained the option to conduct overnight or longer term repo or reverse repo under the Liquidity Adjustment Facility (LAF) depending on market conditions and other relevant factors.

In the past, the Reserve Bank had also conducted 7-, 14- and 28-day repos.

Banks and financial institutions are not permitted to grant loans against Certificate of Deposits (CDs). Furthermore, they are not permitted to buy-back their own CDs before maturity. However, on a review, the RBI has decided to relax these restrictions on lending and buy-back, for 15 days from Tuesday only in respect of the CDs held by mutual funds.

“While granting such loans to mutual funds, banks should keep in view the provisions of paragraph 44(2) of the SEBI (Mutual Funds) Regulations, 1996. Further, such finance, if extended to equity-oriented mutual funds, will form part of banks’ capital market exposure, as hitherto,” the RBI said.