The Reserve Bank on Tuesday decided to inject Rs 20,000 crore (Rs 200 billion) through short-term lending route to help the mutual funds meet their liquidity needs and overcome redemption pressure.
"RBI has decided to conduct a special 14-day repo at nine per cent per annum for Rs 20,000 crore on Tuesday with a view to enabling banks to meet the liquidity requirement of mutual funds," the central bank said.
The decision will help the mutual fund industry to meet redemption pressure following the credit crisis in the financial sector.
Meanwhile, Finance Minister P Chidambaram while welcoming the decision by RBI said it was taken in view of the liquidity stress being faced by some mutual funds.
Fund houses said that the move will help in stabilising the mutual fund industry and help investors too.
"Most of mutual fund industry is facing redemption pressures in liquid funds and commercial papers and deposits. Net asset value of liquid funds is turning negative. The move is just to tell the MFs that they can take from the RBI," R K Gupta, managing director of Taurus Asset Management Company, said.
This will ease the selling pressure which liquid funds are facing, he said.
Welcoming the step, chief marketing officer of UTI Mutual Fund Jaideep Bhattacharya said 'in this tight money situation, it will benefit the industry as whole. The redemption pressure which most of the mutual funds are facing, will ease of".
To increase money supply, RBI has been taking measures. It reduced the mandatory cash requirement for banks (cash reserve ratio) by 150 basis points to infuse more liquidity in the market to the tune of Rs 60,000 crore (Rs 600 billion).
Besides, it also indirectly reduced statutory liquidity ratio by one per cent to 24 per cent.