RBI offers on-tap TLTRO worth Rs 1 lakh crore, OMOs for state bonds to keep lid on yields

Improving liquidity through TLTRO/OMO

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In News:

  • While keeping the key policy rates unchanged, the RBI has announced various measures to bring more liquidity in the financial markets, keep bond yields under control, and improve availability of debt to specific sectors.

Improving liquidity through TLTRO/OMO
Improving liquidity through TLTRO/OMO

Measures announced:

  • On-tap TLTRO to improve liquidity:
    • The RBI has introduced on-tap targeted long-term repo operations (TLTRO) of Rs 1 lakh crore for providing additional liquidity to sectors with backward and forward linkages to growth.
      • On-tap refers to being made available whenever needed.
    • RBI will conduct on-tap TLTRO with tenors of up to three years for a total amount of up to Rs 1 lakh crore at a floating rate linked to the policy repo rate.
    • The scheme will be available up to March 31, 2021, with flexibility with regard to increase in the amount and period after a review of the response to the scheme.
    • Liquidity availed by banks under the scheme has to be deployed in corporate bonds, commercial papers and NCDs issued by entities in specific sectors.
  • OMOs for state development loans (SDLs):
    • In the current difficult economic circumstances, a huge oversupply of Central and State government bonds are expected to hit the market towards the end of the fiscal.
    • Without any relevant action, it could result in higher long-term bond yields, which means higher borrowing costs for the states.
    • Keeping this in mind, the RBI has also announced open market operations (OMOs) for state development loans (SDLs) for the first time.
    • The OMOs of SDLs will address the issue of oversupply of these bonds in the second half of the fiscal.
    • This will help lower the yields in bond markets. With RBI’s intervention, analysts expect that the G-Sec 10-year yield will drop closer to 5 per cent.
Improving liquidity through TLTRO/OMO
Improving liquidity through TLTRO/OMO

About: ‘Targeted’ LTRO (TLTRO)

  • Long Term Repo Operation (LTRO) is a tool that lets banks borrow one to three-year funds from the central bank at the repo rate, by providing government securities with similar or higher tenure as collateral.
  • This helps banks get funds for a longer duration as compared to the short-term (up to 28 days) liquidity provided by the RBI through other tools such as liquidity adjustment facility (LAF) and marginal standing facility (MSF).
  • In ‘Targeted’ LTRO (TLTRO), the central bank requires that the banks opting for funds under this option should specifically invest in certain targeted sectors/instruments.
    • For example, RBI announced TLTRO 2.0 in April 2020 aimed at providing liquidity to small and mid-sized corporates, including NMFCs and MFIs.
    • The borrowing banks were required to allocate 10 per cent to MFIs, 15 per cent to NBFCs with asset size of up to Rs 500 crore, and 25 per cent to NBFCs with asset size of Rs 500 – Rs 5,000 crore rated in investment grade.
  • Available at the policy repo rate for tenors up to three years, the funds availed under this facility would have to be deployed within 30 working days from the date of the operation.
  • Note: The banks will have to maintain the amount of specified securities for the amount received in TLTRO in its HTM (Held to Maturity) book at all times until the maturity of TLTRO.
Significance of LTROs:
  • LTROs provide banks with access to cheaper capital from the RBI. This, in turn, encourages them to lend more and spur economic activity.
  • They can also invest these long-term funds in assets that yield better returns to improve profitability.
  • Also, as banks provide government securities as collateral, the demand for such government bonds increases and helps in lowering yield.
  • TLTRO helps those segments of industry struggling for credit as there would be more banks willing to lend to them.

About: OMOs

  • Open market operations is the sale and purchase of government securities and treasury bills by the central bank of the country.
  • The objective of OMO is to regulate the money supply in the economy.
  • When the RBI wants to increase the money supply in the economy, it purchases the government securities from the market and it sells government securities to suck out liquidity from the system.
  • RBI carries out the OMO through commercial banks and does not directly deal with the public.

Also Read: Economic Updates: RBI receives poor response for first auction under TLTRO 2.0

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