Lessons from Franklin Templeton: RBI liquidity helping mutual funds stabilise, says Shaktikanta Das

In April Franklin Templeton announced its decision to wind-up six debt mutual fund schemes citing liquidity issues post which RBI had announced measures to improve liquidity.

The Reserve Bank of India’s liquidity measures have been helping the mutual fund industry stabilise after the Franklin Templeton credit funds fiasco, Governor Shaktikanta Das said on Thursday. In a virtual media address post the RBI Monetary Policy Committee’s decision to keep repo rate unchanged, Shaktikanta Das explained how the central bank’s efforts in the past few months have been taking shape. In April Franklin Templeton announced its decision to wind-up six debt mutual fund schemes citing liquidity issues post which RBI had announced measures to improve liquidity. The six funds include; Franklin India Low Duration Fund, Franklin India Dynamic Accrual Fund, Franklin India Credit Risk Fund, Franklin India Short Term Income Plan, Franklin India Ultra Short Bond Fund and Franklin India Income Opportunities Fund.

The RBI Governor said that the impact of MPCs rates would not be possible without creating liquidity which was done through Operation Twist and TLTRO 1.0. “Abundant liquidity has supported other segments of financial markets too. In particular, mutual funds (MF) have stabilised since the Franklin Templeton episode,” RBI Governor Shaktikanta Das said. Net outflows from credit-risk funds in April stood at Rs 19,238 crore in April and in June the number was down to just Rs 1,493 crore. “Assets under management of Debt MFs, which fell to Rs 12.20 lakh crore as on April 29, 2020, recovered and improved to Rs 13.89 lakh crore as on July 31, 2020,” Das added.

The Reserve Bank of India had tried to address the issue of liquidity. Shaktikanta Das added that liquidity has helped spreads decline and brought down borrowing costs for corporations which has led to record primary issuance of corporate bonds of Rs 2.09 lakh crore in the April-June quarter. In his address the RBI Governor highlighted that for AA+ rated 3-year NBFC bonds, spreads over similar tenor G-secs have narrowed from 360 basis points on March 26 to 139 basis points at the end of last month.

“Policy rate reductions in recent times have been supported with easy liquidity conditions. Consequently, the transmission of rate cuts have been relatively better. The RBI is likely to remain in surplus liquidity mode throughout the year,” said Navneet Munot, CIO, SBI Mutual Fund.

Borrowing costs have been brought down to lowest in a decade on the back of abundant liquidity. “Interest rates on instruments like the 3-month Treasury bill, commercial paper (CP) and certificates of deposit have fully priced in the reduction in the policy rate and are, in fact, trading below it in the secondary market,” Shaktikanta Das said.