Long Term Repo Operations (LTROs)

What is Long Term Repo Operations (LTROs)?

• 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 the liquidity of the banking system and promote lending activities of banks.
• Funds through LTRO will be provided at the 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 years) will have a 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 their 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:

1.  It will enhance liquidity in the banking system by Rs 1 lakh crore
2. Since the interest rate is comparatively low, there will be downward pressure on short term lending rates.

These two will bring the effect of a slightly easy monetary policy.

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.

Objectives of LTRO

• To assure banks about the availability of durable liquidity at a 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.

RBI announced a timetable for undertaking the LTRO.

Features of Long-Term Repo Operations (LTRO)

Following are the features of the 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 a 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.