1/n So what does the @RBI's new Special Liquidity Facility for Mutual Funds mean?

@andymukherjee70 @BalakrishnanR @latha_venkatesh @ananthng @dugalira @Moneylifers @suchetadalal @dmuthuk @SumairaAbidi @ActusDei

2/n First it will help mutual funds meet their redemption pressures. They no longer have to sell their best quality most liquid papers to meet redemption requests. They can borrow from banks against the collateral of investment grade paper.

3/n Secondly and more importantly it brings back confidence to investors that the RBI will support the liquidity needs of the industry. Their redemption requests will hence go down providing another breather to mutual funds.

4/n Do mutual funds have enough investment grade paper to place as collateral? Of course, plenty. Mutual funds do not, ab initio, buy non-investment grade names. Even in credit risk funds the majority of investments will be A- and above.

5/n Don't have the exact numbers but 90-95% of the Rs. 10 lakh crores in debt funds must be investment grade (BBB- and above).

Of course lending banks will choose what papers they want as collateral and they will start from AAA.

6/n More regulatory action need to come. @SEBI_India needs to step in and get Franklin Templeton to rescind their winding up decision of 6 of their funds. The raison d'etre for the unwind has been largely negated by RBI action.

7/n Yes many investors will still not trust Franklin and will want to head out of the door the moment this is announced (if announced). One solution may be to allow graded %-wise withdrawal over the next 3-4 weeks.