RBI announced Long Term Repo Operations (LTRO) facility: All you need to know about

RBI announced Long Term Repo Operations (LTRO) facility: All you need to know about

RBI has announced a new liquidity facility under Long Term Repo Operations (LTRO) to inject liquidity in the banking system. The new policy tool comes in the context of the RBI’s limitations in cutting its policy rate as well as its desire to enhance liquidity of the banking system and promote lending activities of banks.

♦What is LTRO?

  • Under LTRO, RBI will conduct term repos of 1 year and 3 years tenors of appropriate sizes for up to a total amount of Rs 1 lakh crore at the policy repo rate.
  • This means that banks can avail one year and three-year loans at the same interest rate of one day repo. Usually, loans with higher maturity period (here like 1 year and 3 year) will have higher interest rate compared to short term (repo) loans.
  • If the RBI is ready to give one-year and three year loans at the low repo rate, then there will be a clear pressure on banks to reduce thier lending rates. Hence, the most important effect of the LTRO in the system will be a decline in short term lending rates of banks.

There are two clear effects of LTROs:

  •  it will enhance liquidity in the banking system by Rs 1 lakh crore
  •  since the interest rate is comparatively low, there will be a downard pressure on short term lending rates.

Note: According to the RBI, the LTRO scheme will be in addition to the existing LAF and MSF (Marginal Standing Facility) operations. 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.

♦Why did RBI introduce LTRO?

  • RBI introduced LTRO with a view to assuring banks about the availability of durable liquidity at reasonable cost relative to prevailing market conditions, and to further encourage banks to undertake maturity transformation smoothly and seamlessly so as to augment credit flows to productive sectors.

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♦Objectives of LTRO

  • To assure banks about the availability of durable liquidity at reasonable cost relative to prevailing market conditions.
  • Further encourage banks to undertake maturity transformation smoothly and seamlessly so as to augment credit flows to productive sectors.

While announcing the LTRO, the RBI also hinted that the current liquidity framework may be revised soon. The current liquidity framework involves LAF family instruments like repo, reverse repo, term repo etc and the Marginal Standing Facility.

♦Features of Long-Term Repo Operations (LTRO)

  • Maturity period (tenor): One-year and three-year tenors
  • Total funds to be injected: Up to Rs 1,00,000 crores
  • Interest rate: at the prevailing policy rate (Repo rate).
  • Method of fund injection: CBS (E-KUBER) platform. The operations would be conducted at a fixed rate.
  • Banks would be required to place their requests for the amount sought under LTRO during the window timing at the prevailing policy repo rate. Bids below or above policy rate will be rejected.
  • If there is over-subscription of the notified amount, the allotment will be done on pro-rata basis. RBI will, however, reserve the right to inject marginally higher amount than the notified amount due to rounding effects.
  • The minimum bid amount would be Rupees one crore and multiples thereof. There will be no restriction on the maximum amount of bidding by individual bidders.
  • The eligible collateral and the applicable haircuts for LTRO will remain the same as applicable for LAF.
  • All other terms and conditions as applicable to LAF operations for the LTRO.

♦When will LTRO start?

  • RBI said they will conduct LTRO from the fortnight beginning on February 15, at the policy rate.

♦How will it work?

  • It is a measure that market participants expect will bring down short-term rates and also boost investment in corporate bonds. These new measures coupled with RBI’s earlier introduced ‘Operation Twist’ are an attempt by the central bank to manage bond yields and push transmission of earlier rate cuts.

♦How will the interest be calculated?

  •  The LTROs will be conducted on a fixed-rate basis and the rate will remain fixed for the tenor of the operation and will be compounded on an annual basis. The rate of interest will be fixed at the prevailing repo rate of 5.15 percent
  • For instance, if a winning bidder makes an offer of Rs 1 crore, he/she will pay Rs 5.15 lakh as interest on the date of maturity of the instrument in the case of the one-year LTRO (or 365 days). Under the three-year LTRO (or 1095 days), the winning bidder will pay nearly Rs 16.25 lakh as interest on the date of maturity.

♦Different between LTRO and Term Repo

Feature LTRO Term Repo
Interest rate Fixed and at repo rate Variable, depending upon auctions but higher than repo rate.
Term structure 1 year or 3 year 3 to 28 days
Individual bank’s bid size No restriction on the maximum amount of bidding by individual bidders. 0.75% of the banks’ NDTL.
Disbursal Auction (e-Kuber) Auction (e-Kuber)
Applicants Scheduled commercial banks Scheduled commercial banks
Collateral Same as under LAF Same as under LAF
Total fund injections Limit to be determined by the RBI Limit to be determined by the RBI

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