UPDATE 1-India funds turn to central bank amid cash crunch

(Adds analyst's comments in paragraphs 6 and 7)

By Saikat Chatterjee and Nishant Kumar

MUMBAI, Oct 12 (Reuters) - India's mutual funds have asked the central bank to lend them short-term cash via a repurchase facility after the global financial crisis virtually paralysed the country's money markets, fund executives said.

The Reserve Bank of India is considering the proposal to let mutual funds deposit some of the short-term bank debt they hold with the central bank in exchange for cash, said four senior executives, who are involved in talks with the central bank and declined to be named.

Central bank repurchase facilities are normally only open to banks and primary dealers. The central bank's spokeswoman said she could not immediately comment.

Mutual funds would normally sell bank debt on the money market to raise cash to meet redemptions, which should have risen in September as customers pulled out money for quarterly tax payments.

But Indian money markets have been hit by the global financial crisis, which has wrecked banks across the United States and Europe and made lenders around the world wary of dealing with each other.

Aditya Agarwal, managing director and head of Indian markets for fund research firm Morningstar (MORN.O: Quote, Profile, Research), said the proposal was indicative of the redemption pressures on mutual funds, particularly liquid funds, and was a precautionary step to ensure enough liquidity.

"This is not a panicky but a safeguarding measure," he said.