Topics Covered: Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment.
Long term repo operation (TLTRO):
Context:
The Reserve Bank of India (RBI) has said it will conduct on-tap targeted long-term repo operations (TLTRO) for an amount of Rs 1 lakh crore to ensure comfortable liquidity conditions in the system.
What else has the RBI said?
Liquidity availed by banks under the scheme has to be deployed in corporate bonds, commercial papers, loans and non-convertible debentures issued by entities in specific sectors over and above the outstanding level of their investments in such instruments as on September 30, 2020.
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.
InstaLinks:
Prelims Link:
- What is LTRO?
- What is MSF?
- What is LAF.
- What are open market operations?
- Monetary vs Fiscal policies.
Sources: the Hindu.
