Kolkata: Debt mutual funds may be mandated to hold more government bonds incrementally to overcome liquidity Issues in case of sudden redemption as it happened during the recent Franklin Templeton fiasco, research papers from Reserve Bank of India said, highlighting the need for more policy measures to de-stress the economy.

The central bank also observed that non-bank finance companies (NBFC) could face liquidity pressure while meeting repayments in commercial papers and bonds the next few months and they may need to borrow from banks to meet the gap.

Institutions including NBFCs are the biggest investors in open-ended debt mutual funds and such inter-connectivity lead to more correlated withdrawals at the time of stress, exerting more pressure, according to RBI research documents published in its June bulletin.

“Given the dichotomy between economies of scale of a fund with large assets under management and its adverse spillovers leading to macroprudential concerns during stressed times, there’s need for a holistic approach, balancing the size and vulnerability, specifically with regard to open-ended debt funds. One particular way to address the same may be through stipulating that the ratio of government securities in incremental holding should increase as the size of a debt scheme increases,” the researchers suggested.

In another paper, RBI noted that the near-term scheduled redemptions of commercial papers and corporate bonds issued by NBFCs could be bridged through bank loans or market borrowings.

“Given the current financing conditions and developments in the mutual fund sector, the possibility of liquidity pressures remaining elevated for some of these NBFCs,” it said.

RBI measures to fight the Covid-19 induced stress had a salutary impact on financial markets. However, the researchers believe more policy interventions are needed as stress is still visible in certain areas of the market.

“The emerging developments indicate the need for policy interventions, which go beyond liquidity related measures to credit related ones. There is a need for ensuring flow of credit/liquidity to NBFCs with concrete credit backstop to address the risk aversion in the system,” they said.