Long Term Repo Operation (LTRO) is fundamentally a means to infiltrate liquidity into the banking system and financial institutions to ensure the streamlined transmission of credit flow and monetary policy actions into the Indian economy. Furthermore, after the RBI (Reserve Bank of India) announced the repo rate cuts, there was a question about the efficient transmission of those repo rate cuts to the clients. Therefore, by going for LTRO (Long Term Repo Operation), the RBI assured the efficient communication of the monetary policy decisions.
In simpler terms, under LTRO (Long Term Repo Operation), the Reserve Bank of India presents longer-term loans, varying from one month to three years, to banks and financial institutions at the prevailing market rate. The primary aim of LTRO is to reduce the cost of accounts, as banks obtain long-term funds at lower interest rates.
Key Highlights of LTRO
Some key highlights of LTRO are as follows: These highlights will help you with your UPSC preparations.
- The LTRO is a mechanism under which the RBI renders loans to banks and financial institutions at the current repo rate, acknowledging government securities with equivalent or higher terms as the collateral.
- While the Reserve Bank of India’s existing windows of MSF (Marginal Standing Facility) and LAF (Liquidity Adjustment Facility) offer banks and financial institutions funds for their immediate requirements ranging from 1-28 days, the LTRO (Long Term Repo Operation) provides them with liquidity for 1- to 3-year funds requirements.
- LTRO functions remain intended to control short-term interest rates in the industry from sailing a long way away from the prevailing policy rate, which is the repo rate.
- Banks and financial institutions must place their requests for the loan amount sought under a long-term repo operation during the window timing at the existing policy repo rate, and bids above or below the policy rate will get rejected.
- LTRO transactions occur on E-KUBER, a core banking solution platform introduced in 2012. These Core Banking Solutions (CBS) refers to the solution that allows banks to present a multitude of client-centric assistance round the clock from a single place, supporting corporate and retail banking activities.
- The minimum bid sum for banks and financial institutions would be INR 1 crore and multiples. In addition, there will be no limitation on the maximum bidding sum by individual bidders.
Get an answer for what is core banking solution in the linked article.
Advantages of LTRO (Long Term Repo Operation)
After the economic slowdown hit India and the IL&FS fiasco initiated a rise in borrowing expenses, the Reserve Bank of India attempted to boost the economy through easy-money guidelines. It was why the RBI introduced the LTRO (Long Term Repo Operation) to cut down the repo rate (the rate at which banks and financial instituted borrowing money from RBI) to reduce the prevailing interest rate. Below are some top advantages of LTRO.
- Reduce the cost of funds for banks and financial institutes: LTRO aims to reduce the cost of funds borrowed for banks and financial institutions without slashing deposit rates. This will make the reverse repo rate the prevailing policy rate over a fixed point in time.
- Help boost investment: It is expected to reduce short-term rates and encourage investment in corporate bonds.
- Guarantee banks and financial institutions have durable liquidity: These actions get carried forward to guarantee banks the availability of stable liquidity at an affordable cost relative to existing market conditions.
- Ensure credit flow to banking sectors: This should motivate banks to embark on maturity transformation seamlessly and smoothly to increase credit flows.
In a nutshell, the LTRO (Long Term Repo Operations) will assist the Reserve Bank of India to guarantee that the banks and financial institutions lower their lending rates without diminishing the policy rates.
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