Long Term Repo Operation (LTRO)

Long Term Repo Operation (LTRO)

Subject: Economy

Context:

The Reserve Bank of India (RBI) is understood to have broached the possibility of conducting Long Term Variable Rate Reverse Repo (LTRR) auctions with banks in the run-up to the normalisation of its ultra-accommodative policy

Concept:

Open market operations:

• Open Market Operations (OMOs) are market operations conducted by RBI by way of sale/purchase of government securities to/from the market with an objective to adjust the rupee liquidity conditions in the market on a durable basis.
• If there is excess liquidity, RBI resorts to sale of securities and sucks out the rupee liquidity.
• Similarly, when the liquidity conditions are tight, RBI buys securities from the market, thereby releasing liquidity into the market.
• It is one of the quantitative (to regulate or control the total volume of money) monetary policy tools which is employed by the central bank of a country to control the money supply in the economy.

Long Term Reverse Repo Operation (LTRO)

• LTRR is one of the instruments to manage durable liquidity under the RBI’s revised liquidity management framework. It has a tenor of over 14 days Banks’ prefer investing in treasury bills of 91 days, 182 days and 364 days duration as the bills can be easily liquidated to fund future demand for loans. However, if they invest in LTRR, this flexibility will not be available.
• Long Term Reverse Repo Operation (LTRO) is a mechanism to facilitate the transmission of monetary policy actions and the flow of credit to the economy. This helps in injecting liquidity in the banking system.
• Funds at LTRO are provided at the repo rate. The banks can avail one year and three-year loans at the same interest rate of one day repo. The loans with higher maturity period (here like 1 year and 3 years) will have a higher interest rate compared to short term (repo) loans.
• LTROs are conducted on Core Banking Solution (E-KUBER) platform. The operations would be conducted at a fixed rate.
• The minimum bid amount would be Rs 1 crore and multiples thereof. There will be no restriction on the maximum amount of bidding by individual bidders.

Reverse Repurchase Agreement

• A reverse repurchase agreement, or “reverse repo”, is the purchase of securities with the agreement to sell them at a higher price at a specific future date. For the party selling the security (and agreeing to repurchase it in the future) it is a repurchase agreement (RP) or repo; for the party on the other end of the transaction (buying the security and agreeing to sell in the future) it is a reverse repurchase agreement (RRP) or reverse repo.