24-10-2020 | 18:13 PM
LTRO: Long Term Repo Operation
Context
In order to ensure comfortable liquidity conditions in the system, the Reserve Bank of India has said it will conduct on-tap targeted long-term repo operations for an amount of Rs One lakh crore. RBI argued that liquidity availed by banks under the scheme has to be deployed in corporate bonds, commercial papers, loans and non-convertible debentures issued by entities in specific sectors over and above the outstanding level of their investments in such instruments as on September 30, 2020.
Key points
Long Term Reverse Repo Operation (LTRO) is a mechanism designed to facilitate the transmission of monetary policy actions and the flow of credit into the economy. This will help in injecting liquidity in the banking system.
Under LTRO central bank provides banks 1 year to 3-year money at the prevailing repo rate, accepting government securities with matching or higher tenure as the collateral.
According to the RBI the LTRO scheme will complement the existing Liquidity Adjustment Facility (LAF) and the Marginal Standing Facility (MSF) operations.
How LTRO is different from LAF and MSF?
The LAF and MSF are the two sets of liquidity operations by the RBI with the LAF having a number of tools like repo, reverse repo, term repo etc.
While the RBI’s current windows of liquidity adjustment facility and marginal standing facility offer banks money for their immediate needs ranging from 1-28 days whereas the LTRO supplies them with liquidity for their 1year to 3years of needs. LTRO operations are intended to prevent short-term interest rates in the market from drifting a long way away from the policy rate, which is the repo rate.
LTROs are conducted on Core Banking Solution (E-KUBER) platform and the operations would be conducted at a fixed rate.
The minimum bid amount would be Rs 1 crore and multiples thereof.
There will be no restriction on the maximum amount of bidding by the individual bidders.
Significance of LTRO
When banks receive long-term funds at lower rates, their cost of funds drops. They in turn will reduce borrowers' interest rates.
LTRO helped RBI to ensure that without reducing policy rates, banks reduce their marginal cost of funds-based lending rate.
LTRO also showed to the market that for its monetary policy, RBI will not only rely on the revision of repo rates and the conduct of open market operations, but will also use new tools to achieve its intended objectives.
According to the RBI, the Liquidity Adjustment Facility (LAF) and the Marginal Standing Facility (MSF) operations would be complemented by the LTRO system.
It will ensure that banks have durable liquidity, as the efforts are being carried forward with a view to assuring banks about the availability of durable liquidity at a reasonable cost compared to prevailing market conditions.
LTRO will also ensure credit flow to productive sectors as this should encourage banks to undergo maturity transformation smoothly and seamlessly so as to increase credit flows to productive sectors.
