In its second intervention in the last 10 days, the Reserve Bank of India has announced special lending of up to Rs 50,000 crores to ease liquidity pressure on mutual funds. This is the third tranche of RBI stimulus after the coronavirus outbreak in the country. The decision to infuse liquidity was taken to allay the fears of investors, who began to exit mutual fund debt schemes after Franklin Templeton Mutual Fund shut six of its debt schemes. The RBI believes that assurance of liquidity itself will soothe the nerves of tense investors.
On Monday, RBI governor Shaktikanta Das said banks can borrow up to Rs 50,000 crores over the next 90 days from the central bank for lending the money to cash-starved MFs. The banks could also use the money for buying investment-grade corporate bonds or commercial papers or certificates of deposits from them.
The success of the RBI’s special window, however, would depend on the risk appetite of the banks, which remained low for a long time. The banks have parked Rs 6.9 lakh crores with the RBI for earning a paltry interest of 3.75 per cent a year, though this money could have earned them higher profits if it was lent to borrowers. But the risk-averse banks didn’t do so. Even when the RBI offered Rs 1.7 lakh crores as the special funding, the banks lent most of the money to big companies and strong NBFCs. They didn’t avail full funding of Rs 50,000 crores, which was offered by the RBI for lending to smaller NBFCs. Similarly, the current liquidity infusion too will not help small high-risk mutual funds, which may continue to face pressure. The government, however, has adopted a hands-off approach like Nero when the economy is burning like Rome.