The RBI said on Wednesday that it would provide asset managers with critical access to special funding as the sector faces a surge in redemption requests.
Short-term interest rates have surged and shares have slumped after the Reserve Bank of India unveiled measures late on Monday in an attempt to shore up the ailing rupee.
The temporary, three-day repo borrowing window for mutual funds will make up to Rs 250 billion available to asset management companies at 10.25 per cent interest, according to a notification issued on Wednesday.
Further details will be provided at a later date, the Reserve bank of India (RBI) said.
"It seems like a pro-active move on part of RBI, which should help settle some nerves. This move would help mutual funds meet their redemptions and this would also help stabilise the yields in the market," said Ganti N. Murthy, head of fixed income at Peerless Fund Management Co. Ltd.
Fund managers had worried they would face a surge in redemptions from investors in shorter-duration debt funds, such as money market funds, as a direct consequence of the RBI's actions.
Liquid and money market funds had assets under management of Rs 1.6 trillion as of the end of June. Banks and companies tend to be the biggest investors in liquid and money market funds to manage excess cash.
"By last evening the situation was so bad that we felt mutual funds could face a payment crisis," said Taurus Mutual Fund chief executive, R.K. Gupta said.
"This gives us room to manage the outflows."
The RBI last provided a repo window to asset managers in the wake of the 2008 financial crisis.
Dealers said one-month certificates of deposit were trading at 10.25 per cent, having jumped 275 basis points on Tuesday and so far on Wednesday.
One-year CDs were trading at 10.1 per cent from 9.83 per cent after jumping 150 basis point in the previous session.