LTRO – Long Term Repo Operations by RBI
LTRO, Long-term repo operations, is a new liquidity tool announced by the Reserve Bank of India to stimulate the Indian economy. RBI, the central Bank of India, announced the measures on 6th February, 2020. LTROs are effectively used by European banks as a liquidity infusion tool.
What is Long Term Repo Operations (LTRO)?
Long Term Repo Operations is a mechanism announced by RBI which can be utilised by Indian banks to borrow from the Central Bank. Through LTRO route, RBI will offer funds to banks for a period between one to three years, at the prevailing Repo Rate. As collateral security, banks shall provide securities with matching or higher tenure.
What compelled the announcement of Long Term Repo Operations (LTRO)?
Indian economy has been facing a slow down during the recent times. ILFS failure and subsequent liquidity crunches faced by NBFCs have been the root causes of the slowdown. Despite the efforts by RBI, banks have been Through LTRO route infusion of Rupees one lakh crore into the Indian banking system is envisaged.
In addition, since January 2019, RBI has reduced Repo Rates substantially. However, this reduction has not been transmitted to end borrowers by the banks. Through Long Term Repo Operations (LTRO), RBI is infusing sufficient funds to market. This will make the cost of lending cheap thereby compelling banks to pass on the benefit to borrowers.
What are the present liquidity tools?
Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) are the two existing liquidity tools and both take care of short term requirements, ranging between 1 and 28 days. Banks have been complaining that the funds made available to them through MSF and LAF are miniscule and short term in nature and prevents them from passing on any benefits to borrowers.
LTRO is long term in nature and supplies liquidity to the banking system for their 1 to 3 year needs. It is envisaged to infuse Rupees one lakh crore into the economy at Repo Rate.
What are the advantages and disadvantages associated with Long Term Repo Operations (LTRO)?
The substantial reduction in repo rate has failed to get transmitted to the market through lending rate. LTRO being low-cost, will force banks to bring down interest rates on loans. LTRO operations will enable RBI to align the lending rates with the Repo Rate. Low lending rate is good for borrowers, fresh investments and employment generation.
LTRO will also bring down the bond yields for shorter-term securities (in the 1-3-year tenor).
However, availability of cheap funds may cause banks to reduce deposits rates. This may land up pensioners and deposit customers who depend on interest income for survival. Further, availability of more liquidity in market may cause the inflation to go up, unless properly monitored and controlled.
