The Reserve Bank of India (RBI) will collaborate with market regulator Securities and Exchange Board of India (Sebi) to finalise the guidelines for banks investments in mutual funds which are seen as a destabiliser during market swings.

RBI has been taking inputs from us. The apex bank is concerned about volatility in inflows into mutual funds from banks. This time, it may involve Sebi in formulating the guidelines, said S Sridhar, chairman and managing director, Central Bank , on the sidelines of a media conference ahead of the bankers conference beginning on Friday.

An analysis of the pattern of banks investment in mutual funds shows that inflows tend to be volatile, typically during the beginning and end of a quarter and also at times of a sharp surge in loan demand. One saw banks withdrawing funds from mutual funds when they had to lend over Rs 1 lakh crore loan to telecom companies to pay various spectrum fees. Mutual funds are regulated by Sebi.

The RBI has been concerned over investments in mutual funds, essentially debt funds because it amounted to diverting from its core business of lending. Besides, there have been fears of circularity of fund flows from banks to mutual funds and back through the collateralised borrowing and lending obligation (CBLO) route.

Also, mutual funds subscribed to commercial papers issued by corporates, which affected the resource flow to commercial sector by banks.

Former RBI Governor, YV Reddy, recently told ET that the circularity of investments between banks and mutual funds was one of the instances of excess of financialisation in the Indian economy, which the regulators needed to address as it did not give a clear state of the financial sector growth in the economy.