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The Securities and Exchange Board of India (Sebi) has written to the Reserve Bank of India (RBI) to explore the possibility of mutual fund schemes being granted an ongoing window to meet liquidity needs.
Such windows have previously been made available to mutual funds during times when the industry has faced a severe cash crunch. The stock market regulator has invited the central bank's feedback on whether such a repo window can be used to provide stability on an ongoing basis in addition to in times of such crises.
A repo window allows entities to borrow from the central bank to meet short-term liquidity requirements.
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The stock market regulator's proposal to the central bank suggests that mutual funds could be given a repo window to the tune of Rs 20,000 crore to Rs 30,000 crore to bring about stability to such funds, in addition to helping in times of heightened volatility.
Interestingly, the proposal comes at a time when RBI has been giving indications that it plans to shut the repo window for banks as well.
RBI had opened a repo window for mutual funds in
2008 and 2013 to help deal with the redemption pressure for liquid schemes. The first was prompted by a severe liquidity crunch on account of the global financial crisis. The window last year followed a sudden rise in short-term interest rates.
In July last year, RBI had increased the short-term interest rate as a measure to prevent the rupee from sliding further. Anticipating that mutual funds, specifically liquid schemes, would face redemption pressure, the central bank opened a three-day repo window for mutual funds. The repo window to meet liquidity needs was subject to a cap of Rs 25,000 crore.
Many market players argued even when the window was opened for mutual funds, it was not widely used. "Having a repo window to enable mutual funds to brace for redemption pressure is a good step as a short-term emergency measure but having it on an ongoing basis may not be much of a game-changer," said a market participant.
The Sebi has argued that mutual funds may not use the repo window at all to borrow from banks but the move will bring stability and confidence in the market.
An email sent to the regulator did not receive a reply till the time of going to press.
A senior official with a domestic mutual fund suggested that an ongoing repo window would protect liquid schemes from volatility. Liquid funds are used, generally by corporate entities, to park funds for a short period of time. They invest in short-term securities which can generally be quickly sold in the market, except in times of a liquidity crisis.
"Many fund houses have an affiliate bank that gives them easy access to meet borrowing needs. However, higher borrowings are subject to regulatory approval. An ongoing repo window will aid asset management companies not affiliated to banks," said the chief executive officer of a domestic mutual fund.
