Broader Borrowing Powers for Funds

India's market regulator, Sebi, is asking for public opinions on a plan to expand intraday borrowing options for mutual funds. The Association of Mutual Funds in India (AMFI) had pushed for this change, pointing out ongoing operational difficulties. Fund managers have struggled with mismatches between money going out and money coming in, which made it hard to manage funds and execute trades smoothly. The new proposal would let mutual funds borrow during the day not just for investor payouts, but also for other essential tasks like settling trades, handling foreign exchange, and meeting margin calls on derivatives. This recognizes that today's markets often see short cash gaps due to different settlement times. Earlier rules, set to start April 1, 2026, had limited borrowing mainly to guaranteed income and redemptions. However, these rules were delayed to July 15, 2026, after the industry cited practical issues.

Balancing Flexibility with Leverage Risk

While the plan could make operations smoother, it also brings a greater risk of short-term borrowing for mutual funds. Sebi's main requirement is that all intraday loans must be repaid by the end of each trading day. Any borrowing that carries over into the next day must stay within the current limit of 20% of a fund's net asset value and for no longer than six months. Importantly, Asset Management Companies (AMCs) alone are responsible for these short-term debts, including any costs or losses. The previous, tighter rules for this were delayed to July 15, 2026, because AMCs cited operational preparedness issues, highlighting the need for strong internal checks.

Background: Sebi's Evolving Rules

This new proposal builds on Sebi's existing rules for fund liquidity management, which allow mutual funds to borrow up to 20% of their net assets for up to six months for purposes like redemptions and trade settlements for index funds and ETFs. An earlier directive from March 13, 2026, had set tighter limits for intraday borrowing, mainly for guaranteed income and specific payouts. AMFI argued these limits restricted fund managers' ability to trade on the same day. This led to the current proposal, which loosens restrictions on receivables and broadens what borrowing can be used for. Public feedback on this latest plan is due by June 3, 2026, with a final framework expected later in the year.

Market Factors and Borrowing

This regulatory change comes as economic conditions, especially interest rates, continue to shift. While the proposal targets operational cash flow, interest rate changes can indirectly affect how funds perform. Higher borrowing costs for companies can hurt profits and equity fund returns. Lower rates can encourage business growth and boost stock markets. For bond funds, rising rates usually lower bond prices and fund values, with longer-term bonds suffering more. In this climate, the planned boost in intraday cash management could be very helpful for fund managers dealing with market swings. It allows them to better deploy capital and manage returns when interest rates are fluctuating, which is especially important when market sentiment can change quickly due to economic policy.

Concerns Over AMC Readiness and Risk

However, this expansion introduces a significant risk of increased short-term leverage if not managed carefully. The main concern is whether Asset Management Companies (AMCs) will strictly follow Sebi's rule to repay all borrowed money by day's end. The industry's varied readiness for this flexibility, evident from previous delays, raises questions about the potential for mismanaged liquidity or over-reliance on intraday credit to hide underlying funding shortfalls. This is especially relevant when compared to more developed markets with potentially stricter leverage oversight. While AMCs are liable for all costs, errors or unexpected market shocks could strain liquidity if these facilities are used too aggressively without robust risk management. AMCs must ensure these tools boost efficiency, not become a source of unmanaged short-term debt.