RBI MEASURES

Subject: Economy

Context: RBI has introduced on-tap targeted long-term repo operations (TLTRO) of Rs 1,00,000 crore for providing additional liquidity and extended SLR holding limits till March 2022 and announced open market operations (OMOs) for state development loans (SDLs) for the first time to compress the rising spreads.

Concept:

On-tap TLTRO:

• The LTRO is a tool under which the RBI provides one-year to three-year money to banks at the prevailing repo rate, accepting government securities with matching or higher tenure as the collateral. On-tap means it is available all around the year.
• RBI has announced injection of Rs. 1 Lakh Crore into the system through LTRO auctions.
• Therefore, LTRO supplies Banking system with liquidity for their 1- to 3-year needs.

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.

Bond Yield:

The yield of a bond is the effective rate of return that it earns. But the rate of return is not fixed — it changes with the price of the bond.

Bond Yield curve:

• A yield curve is a graphical representation of yields for bonds (with an equal credit rating) over different time horizons.
• If bond investors expect the economy to grow normally, then they would expect to be rewarded more (that is, get more yield) when they lend for a longer period. This gives rise to a normal — upward sloping — yield curve.
• The steepness of this yield curve is determined by how fast an economy is expected to grow. When the economy is expected to grow only marginally, the yield curve is “flat”.
• Yield inversion happens when the yield on a longer tenure bond becomes less than the yield for a shorter tenure bond. A yield inversion typically portends a recession. An inverted yield curve shows that investors expect the future growth to fall sharply.