Long-Term Repo Operations (LTRO)

WHY IN NEWS?

• Recently, the Reserve Bank of India (RBI) received bids worth Rs 1.23 trillion for Rs 25,000 crore on offer for its one-year Long-Term Repo Operations (LTRO).
• RBI also announced the infusion of Rs.1 lakh crore into the system in phases, through the LTRO.

ABOUT LONG-TERM REPO OPERATIONS

• The LTRO is a tool under which the central bank provides one-year to three-year money to banks at the prevailing repo rate, accepting government securities with matching or higher tenure as the collateral.
• While the RBI’s current windows of liquidity adjustment facility (LAF) and marginal standing facility (MSF) offer banks money for their immediate needs ranging from 1-28 days, the LTRO supplies them with liquidity for their 1- to 3-year 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.
• Since January 2019, the repo rate (the rate at which banks borrows quick money from RBI) has been cut by 139 basis points.
• But only a part of these rate cuts have as yet been passed on to borrowers by banks and other lenders.
• The LTRO is a move in a direction in which an increase in the proportion of low-cost funds, banks may now be forced to bring down interest rates on loans.
• The LTRO will also help bring down the yields for shorter-term securities (in the 1-3-year tenor) in the bond market.
• This measure will prompt increased investment in corporate bonds.
• These LTROs, together with the RBI’s earlier introduced ‘Operation Twist’, are an attempt by the central bank to manage bond yields and push transmission of already announced interest rate cuts.

Prelims Question

Q. Consider the following statements regarding Long-Term Repo Operations:
1.The LTRO is a tool under which the central bank provides one-year to three-year money to banks at the prevailing repo rate.
2.This measure will prompt increased investment in corporate bonds.
Which of the statements given above is/are correct?
a)1 only
b)2 only
c)Both 1 and 2
d)Neither 1 nor 2

Answer to the Prelims Question