India’s central bank is weighing opening a new credit facility for banks aimed at boosting their lending to mutual funds, which have been hit by a flood of redemptions, according to people familiar with the matter.
The Reserve Bank of India and finance ministry are in favor of a proposal from the industry regulator to open a cash window that fund houses can tap via their banks, the people said, asking not to be identified as the discussions are private. Other measures to ease a growing cash crunch are being discussed and a final decision is expected soon, one of the people said.
Policy makers are concerned that stress among mutual funds will translate into higher borrowing costs for companies that depend on the sector for short-term funding. Already, yields on commercial paper issued by corporates surged in recent weeks. Companies and funds are hoarding cash fearing a protracted demand slowdown as the coronavirus spreads.
The RBI, finance ministry and Securities and Exchange Board of India did not immediately respond to emails and phone calls seeking comment.
The new facility being contemplated would replicate one from the global financial crisis, when the RBI held special money auctions and accepted as collateral short-term debt securities issued by lenders. The banks were then allowed to use the cash raised to extend loans to mutual funds.
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