New Delhi: The Reserve Bank of India on Monday morning announced a “special liquidity facility” of Rs 50,000 crore for mutual funds, a move that market experts said was desperately needed after Franklin Templeton abruptly shuttered six of its debt funds last week“With a view to easing liquidity pressures on MFs, it has been decided to open a special liquidity facility for mutual funds of Rs 50,000 crore,” the central bank said in a statement.“Heightened volatility in capital markets in reaction to COVID-19 has imposed liquidity strains on mutual funds (MFs), which have intensified in the wake of redemption pressures related to closure of some debt MFs and potential contagious effects therefrom. The stress is, however, confined to the high-risk debt MF segment at this stage; the larger industry remains liquid,” the statement added.Under the special facility, the RBI shall conduct repo operations of 90 days tenor at the fixed repo rate. The SLF-MF is on-tap and open-ended, and banks can submit their bids to avail funding on any day from Monday to Friday, the central bank noted.“Funds availed under the SLF-MF shall be used by banks exclusively for meeting the liquidity requirements of MFs by (1) extending loans, and (2) undertaking outright purchase of and/or repos against the collateral of investment grade corporate bonds, commercial papers (CPs), debentures and certificates of Deposit (CDs) held by MFs.”RBI announcement of Rs.50,000 crore special liquidity window will remove fear/possibility of contagion effect as there are other debt MFs too which have lost 40 to 60% in value over past year. This will also have positive effect on equity funds.— M K Venu (@mkvenu1) April 27, 2020Last week, India’s mutual fund investors received a nasty shock when Franklin Templeton halted withdrawals from six debt mutual fund mutual schemes – freezing over Rs 25,000 crore in investor money – which had large exposures to higher-yielding but lower-rated credit securities. The well-known fund house cited a lack of liquidity amid the COVID-19 pandemic as part of the reason for closing the debt MFs.The closures sparked worries that investors would panic and start withdrawing from other Franklin funds as well as the debt funds of other asset managers. This in turn triggered a storm on social media, with nervous investors calling for regulators to step in.“It is just like a run on banks. Across debt mutual funds, there will be loss of trust,” said Omkeshwar Singh, head of mutual fund advisory firm Rank MF. “Earlier, only corporates were taking out money for cash management. Now, high net worth individuals will go for panic redemption,” Singh told Reuters last week.Also read: What Does Franklin Templeton Shutting Down 6 Debt Funds Mean for the Investor and Industry?In a statement put out last week, former finance minister P. Chidambaram had asked the Centre to “act promptly” to stop any cascading effect.“I recall that a similar situation arose in the first week of October 2008 (during the global financial crisis) when mutual funds faced liquidity stress. Government immediately consulted RBI, SEBI, IBA, AMFI and others. An urgent meeting of the FSDC was convened and a solution was found by the end of the day. On the next morning, officers of RBI and SEBI met at 8 am, and RBI announced a 14-day special repo facility and allowed an additional 0.5 per cent of NDTL. The situation was resolved,” the former finance minister said.