DR Ambedkar IAS Academy

Long-term repo operations (LTROs)

The Reserve Bank of India (RBI) has said it has received Rs 1.13 lakh crore worth of bids in the targeted long term repo operation (TLTRO) conducted for an amount of Rs 25,000 crore with a three-year tenor.
The RBI received 18 bids in the auction. The total bids that were received amounted to Rs 1.13 lakh crore, implying a bid to cover ratio — the amount of bids received relative to the notified amount — of 4.5.

What is LTRO?

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.

How is it different from LAF and MSF?

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.

Why is it important?

As banks get long-term funds at lower rates, their cost of funds falls.

In turn, they reduce interest rates for borrowers.

LTRO helped RBI ensure that banks reduce their marginal cost of funds-based lending rate, without reducing policy rates.

LTRO also showed the market that RBI will not only rely on revising repo rates and conducting open market operations for its monetary policy, but also use new tools to achieve its intended objectives.

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