Repo Rate Cut Releases Pressure of Mutual Funds

Author: Neha Dhamija

The Reserve Bank of India decision to cut the repo rate on by 100 basis points on Monday gave a huge sigh of relief to the mutual funds. The Central bank slashed its key lending rate to 8 percent in an effort to shield the Indian economy from the financial turmoil. The move would definitely help in enhancing the positive sentiments in the mutual fund industry.

The repo rate cut by the RBI automatically leads to a drop in the interest rates of banks. And on this occasion the cut in the repo rate is coupled with the fall in the Cash Reserve Ratio (CRR) with a view to provide some stability and infuse liquidity in the banking sector.

The repo rate cut would have an instantaneous impact on government securities and corporate debt and would make the mark-to-market valuations of these securities more attractive. But Mutual Funds might still face some difficulties in selling out securities issued by Non-Banking Finance Companies.

In order to further ease out the financial pressures, RBI is also going to extend the liquidity window for Mutual Funds. It would facilitate banks to easily lend money to Mutual Funds against Certificates of Deposits (CDs). Banks can buyback their CDs from these mutual fund companies. However, earlier this facility was available for a period of 15 days only.