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What is Long Term Repo Operation? Key things to know

Analysts termed it a masterstroke by RBI Governor Shaktikanta Das.

ETMarkets.com|
Last Updated: Feb 06, 2020, 10.10 PM IST
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Mumbai: To enable better transmission of its monetary policy, the Reserve Bank of India (RBI) on Thursday introduced Long Term Repo Operation (LTRO).

Here are key things you need to know about this policy tool:

  1. What is LTRO?
    Under LTRO, RBI will conduct term repos of one-year and three-year tenors of appropriate sizes for up to a total amount of Rs 1 lakh crore at the policy repo rate.
  2. Why did RBI introduce LTRO?
    RBI introduced LTRO with a view to assuring banks about the availability of durable liquidity at reasonable cost relative to prevailing market conditions, and to further encourage banks to undertake maturity transformation smoothly and seamlessly so as to augment credit flows to productive sectors.
  3. When will LTRO start?
    RBI said they will conduct LTRO from the fortnight beginning on February 15, at the policy rate.
  4. How will it work?
    It is a measure that market participants expect will bring down short-term rates and also boost investment in corporate bonds. These new measures coupled with RBI’s earlier introduced ‘Operation Twist’ are an attempt by the central bank to manage bond yields and push transmission of earlier rate cuts.
  5. What was the immediate impact of LTRO?
    Shorter duration government bond yields plunged on Thursday after the Reserve Bank of India announced Long Term Repo Operation.
  6. What did experts say?
    Analysts termed it as a masterstroke by Governor Shaktikanta Das. According to B Prasanna of ICICI Bank, besides lowering rates in the short end of the sovereign curve, LTRO is also likely to lower corporate bond yields, deposit rates and lending rates. Lakshmi Iyer of Kotak Mahindra AMC said LTRO is a ‘masterstroke’, which is a step towards credit transmission, and demonstrates RBI’s intent towards supporting growth.
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