Mutual Fund Cos Seek RBI Credit Line Amid Huge Redemptions

As the mutual fund industry faces huge redemption in short-duration debt market funds amid market rout, the players seek for some sops from the central bank. During the earlier financial crisis in 2008, the RBI took initiative to support the industry, said mutual fund companies.

Mutual Fund Cos Seek RBI Credit Line Amid Huge Redemptions

Some such measures can be providing credit line to the mutual fund companies such that fund managers do not resort to sell debt instruments at whatever price they get, which pulls fund prices lower.

Leading officials from the industry also demand the RBI to step in and support the commercial paper market similar to the US government which announced measures for supporting the US commercial paper (CP) market).

The commercial paper market in India is already bearing the brunt as the yield on some of the highly rated papers has increased by about 2% since the beginning of March. And as yield and bond prices share inverse relationship, during the same time prices of these debt instruments has crashed significantly.

It is worth mentioning that in the previous crisis that emerged in 2008, the RBI allowed AMCs to borrow from it and honour redemptions instead of selling their portfolio at whatever price that could have otherwise led to a sharp decline in their portfolio value.
And as things stabilized and pace of redemptions normalized, the industry repaid the loan taken from the apex bank.

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