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All You Need to Know About Long Term Repo Operations

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All You Need to Know About Long Term Repo Operations
Rajat Mishra - 05 April 2020

The Reserve Bank of India on Friday announced the third largest Long Term Repo Operation (LTRO) on April 7 for Rs 25,000 crore. However, the apex bank also announced this measure among a range of other measures to meet the challenges of COVID-19. So, what exactly is the Long Term Repo Operation? Let us have a closer look at this.

Long Term Repo Operation is basically a mechanism to inject liquidity into the banking system as well as to ensure the smooth transmission of monetary policy actions and flow of credit into the economy. After RBI went for repo rate cuts, there was a question about the effective transmission of those rate cuts to the customers. So, by going for LTRO the RBI ensured effective transmission of the monetary policy decisions.

Simply speaking, under LTRO the RBI provides longer term loans, ranging from one month to three years, to banks at the prevailing rate. The resultant of this is the reduction in the cost of funds, as banks get long term funds at lower rates.

In the past RBI has invoked this policy measure in extenuating circumstances, and made it clear that it is not only some traditional steps like cutting repo rate or open market operations that the bank will do, rather it can invoke some other policy measures to achieve its desired objectives too. Even on March 23, the central bank announced LTRO of Rs 1 lakh crore in multiple tranches. Before that RBI introduced the first LTRO on February 6 at its monetary policy meet with a view of assuring all banks about the availability of liquidity at reasonable rates.

This also acts as a measure that brings down short term rates and boosts investment in corporate bonds.

Why LTRO?

The IL&FS crisis sent shock waves across the entire Non Banking Financial Companies (NBFCs) that aggravated the slowdown in India by squeezing liquidity and in turn causing credit crunch. That crisis spread its tentacles to almost every sector. Thus, in order to pull the economy out of the gloom, RBI has eased the policy at many levels and slashed repo rates by almost 139 bps. But from time to time the concern has been flagged that the repo rate cut is not being passed on to the borrowers. Hence, RBI started doing LTRO to ensure the smooth transmission of rate cuts to customers, while maintaining enough liquidity in the market.

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