We already know that banks haven’t been passing down the RBI’s rate cuts to the borrowers. Therefore, the RBI took certain steps to drive up monetary policy transmission in its recent monetary policy review in February 2020.
Highlights of the Monetary Policy Review:
- The RBI kept the repo rate unchanged at 5.15 %. It hadn’t cut rates in the last monetary policy review as well. [Also read: Why RBI did not cut interest rates in its last policy review ?]
- The RBI removed the Cash Reserve Ratio (CRR) for incremental loans made to certain sectors. This relaxation would be applicable only to new loans given till 31 July 2020. [Also read: Repo, CRR, Reverse Repo etc explained]
- The RBI announced Long Term Repo Operations (LTRO) for up to a total amount of Rs.100000 crores.
What is LTRO?
LTRO is an unconventional measure taken to inject liquidity into the banking system and boost credit growth.
The RBI decided to give out Rs.100000 crores as loans to banks through auctions at the repo rate of 5.15%. These loans will have long term maturity periods of 1 year and 3 years.
[The repo rate is the rate at which the RBI lends to the commercial banks for a day (overnight lending rate). And, we know that loans with a longer-term maturity (say 1 year) usually have higher interest rates. But, the RBI will give out loans of long term maturity at the overnight lending rate/ repo rate of 5.15%]
Long Term Repo Operations (LTROs) will enable banks to borrow longer-term loans at a cheaper rate. This would reduce the cost of funds for banks and boost lending in the economy.
Banks may also cut their marginal cost-based lending rate (MCLR) and some banks like SBI have already done it.
[Read: What is MCLR?]
The RBI will auction these loans (worth Rs.100000 crores as mentioned) in several tranches. The first auction of loans worth Rs.25000 crores was conducted on 17th February. It had a maturity period of 3 years.
The second was conducted on 24th February for an equal amount but had a maturity period of 1 year.
For more details on Long Term Repo Operations, you may read- RBI Issues FAQs on LTROs.
[You may also read- What is Operation Twist by RBI?]
Update: What is Targeted Long Term Repo Operations (TLRTO)?
Under TLTRO, the banks will have to invest the amount acquired as a loan under LTRO in specified securities. The RBI announced TLTRO 1 and 2 to ease liquidity constraints caused due to the coronavirus pandemic.
Under TLTRO 1, the RBI mandated that the liquidity acquired by the banks through LTROs will have to be deployed in instruments like investment-grade corporate bonds, Commercial Papers, and non-convertible debentures. [You may read: RBI cuts rates to mitigate COVID 19 impact]
Under TLTRO 2, at least 50 % of the funds acquired by the banks through LTROs will have to be deployed in investment-grade corporate bonds, Commercial Papers, and non-convertible debentures of Non-Bank Financial Corporations (NBFCs) and Microfinance Institutions (MFIs).
This is because the deployment of TLTRO 1.0 funds has largely been to bonds issued by public sector entities and large corporates. The money has not flown to NBFCs and MFIs, which have been severely impacted by the disruptions caused by the coronavirus pandemic.
[You may read: RBI cuts reverse repo to combat COVID 19 impact]
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