Long Term Repo Operations (LTROs)

In the Statement on Developmental and Regulatory Policies announced on 6th Feb 2020 RBI has decided of Introducing Long Term Repo Operations (LTROs) for Improving Monetary Transmission or To enable better transmission of its monetary policy.

Since June 2019, the Reserve Bank has ensured that comfortable liquidity is available in the system in order to facilitate the transmission of monetary policy actions and flow of credit to the economy. These efforts are being carried forward with a view to assuring banks about the availability of durable liquidity at reasonable cost relative to prevailing market conditions. RBI expects that this should encourage banks to undertake maturity transformation smoothly and seamlessly so as to augment credit flows to productive sectors. Accordingly, RBI decided that from the fortnight beginning on February 15, 2020, it shall conduct term repos of one-year and three-year tenors of appropriate sizes for up to a total amount of ₹ 1,00,000 crore at the policy repo rate.

  • 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.
  • 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.
  • When will LTRO start?
    RBI said they will conduct LTRO from the fortnight beginning on February 15, at the policy rate.
  • 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.
  • 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.
  • 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.

What is Long Term Repo Operations (LTROs)?

An Article by tojo jose February 8, 2020 (https://www.indianeconomy.net/splclassroom/what-is-long-term-repo-operations-ltros/)

RBI has announced a new liquidity facility under Long Term Repo Operations (LTRO) to inject liquidity in the banking system. The new policy tool comes in the context of the RBI’s limitations in cutting its policy rate as well as its desire to enhance liquidity of the banking system and promote lending activities of banks.

An interesting feature of the RBI’s new effort is that the central bank will be injecting Rs 1 lakh crore into the banking system through auctions with long term maturity periods (compared to one day repos) of 1 year and 3 year.

Funds through LTRO will be provided at the repo rate. This means that banks can avail one year and three-year loans at the same interest rate of one day repo. Usually, loans with higher maturity period (here like 1 year and 3 year) will have higher interest rate compared to short term (repo) loans.

If the RBI is ready to give one-year and three year loans at the low repo rate, then there will be a clear pressure on banks to reduce their lending rates. Hence, the most important effect of the LTRO in the system will be a decline in short term lending rates of banks. There are two clear effects of LTROs:

(a) it will enhance liquidity in the banking system by Rs 1 lakh crore

(b) since the interest rate is comparatively low, there will be a downward pressure on short term lending rates.

These two will bring the effect of a slightly easy monetary policy.

According to the RBI, the LTRO scheme will be in addition to the existing LAF and MSF (Marginal Standing Facility) operations. The LAF and MSF are the two sets of liquidity operations by the RBI with the LAF having a number of tools like repo, reverse repo, term repo etc.

Objectives of LTRO

  • To assure banks about the availability of durable liquidity at reasonable cost relative to prevailing market conditions.
  • Further encourage banks to undertake maturity transformation smoothly and seamlessly so as to augment credit flows to productive sectors.

While announcing the LTRO, the RBI also hinted that the current liquidity framework may be revised soon. The current liquidity framework involves LAF family instruments like repo, reverse repo, term repo etc and the Marginal Standing Facility.

RBI announced a timetable for undertaking the LTRO.

Features of Long-Term Repo Operations (LTRO)

Following are the features of the LTRO:

  • Maturity period (tenor): One-year and three-year tenors
  • Total funds to be injected: Up to Rs 1,00,000 crores
  • Interest rate: at the prevailing policy rate (Repo rate).
  • Method of fund injection: CBS (E-KUBER) platform. The operations would be conducted at a fixed rate.
  • Banks would be required to place their requests for the amount sought under LTRO during the window timing at the prevailing policy repo rate. Bids below or above policy rate will be rejected.
  • If there is over-subscription of the notified amount, the allotment will be done on pro-rata basis. RBI will, however, reserve the right to inject marginally higher amount than the notified amount due to rounding effects.
  • The minimum bid amount would be Rupees one crore and multiples thereof. There will be no restriction on the maximum amount of bidding by individual bidders.
  • The eligible collateral and the applicable haircuts for LTRO will remain the same as applicable for LAF.
  • All other terms and conditions as applicable to LAF operations for the LTRO.

Potential effects of the LTRO

Since, under LTRO, funds are provided at low interest rate of the reop rate, the overall short-term interest rate may come under pressure to register a decline. Similarly, the short-term yield also may fall. Altogether, there will be pressure on the banking system to reduce their lending rates.

How the LTRO is different from the existing term repo?

Already, the RBI is having term repo instrument to inject money into the banking system by providing  higher than one day loans. The term structure is higher but less than 28 days. Interest rate will be higher than repo rate. In this context, following is a comparison between the term repo and LTRO.

Feature LTRO Term Repo
Interest rate Fixed and at repo rate Variable, depending upon auctions but higher than repo rate.
Term structure 1 year or 3 year 3 to 28 days
Individual bank’s bid size No restriction on the maximum amount of bidding by individual bidders. 0.75% of the banks’ NDTL.
Disbursal Auction (e-Kuber) Auction (e-Kuber)
Applicants Scheduled commercial banks Scheduled commercial banks
Collateral Same as under LAF Same as under LAF
Total fund injections Limit to be determined by the RBI Limit to be determined by the RBI

RBI has announced to  conduct Long Term Repo Operations (LTROs) for one-year and three-year tenors for up to a total amount of ₹ 1,00,000 crores at the policy repo rate as under:

Sl. No. Date Notified Amount
(₹ crores)
Tenor Window Timing Date of Reversal
1 February 17, 2020 (Monday) 25,000 3-year 11:00 am to 11:30 am February 16, 2023 (Thursday)
2 February 24, 2020 (Monday) 25,000 1-year 11:00 am to 11:30 am February 23, 2021 (Tuesday)

 Long Term Repo Operations (LTROs) - Operational Guidelines

·         LTROs conducted under this scheme will be in addition to the existing LAF and MSF operations. The total amount of liquidity injected through these operations would be up to ₹ 1,00,000 crores.

·         LTROs will be conducted on CBS (E-KUBER) platform. The operations would be conducted at a fixed rate. Banks would be required to place their requests for the amount sought under LTRO during the window timing at the prevailing policy repo rate. Bids below or above policy rate will be rejected.

·         In case of over-subscription of the notified amount, the allotment will be done on pro-rata basis. RBI will, however, reserve the right to inject marginally higher amount than the notified amount due to rounding effects.

·         The minimum bid amount would be Rupees one crore and multiples thereof. The allotment would be in multiples of Rupees one crore. There will be no restriction on the maximum amount of bidding by individual bidders.

·         The reversal of these operations would take place at the ‘start of day’ on the day of maturity.

·         The eligible collateral for LTROs and the applicable haircuts will remain the same as applicable for LAF.

·         All other terms and conditions as applicable to LAF operations, including facility for security substitution, will also be made applicable to the LTROs, mutatis mutandis.

Clarifications / Frequently Asked Questions (FAQs) on LTROs
The Reserve Bank had announced Long Term Repo Operations (LTROs) for one-year and three-year tenors and operational guidelines for the same, vide Press release dated February 07, 2020. In this regard, the following clarifications are being issued:

Sl. No. Query Clarification
1. What is the maximum amount that a single market participant can bid in LTROs? A market participant can place bids of amount less than or equal to the notified amount. RBI may reject all the bids of the participant if the total bid amount submitted by the participant exceeds the notified amount.
2. When will the interest payment required to be made for LTROs? The interest payment will have to be made upon maturity of LTRO, i.e. on the reversal date.
3. How will the interest be calculated in case of LTROs? The LTROs will be conducted on a fixed-rate basis and the rate will remain fixed for the tenor of the operation. The interest will be compounded on an annual basis.
An Illustration of the Interest calculation for LTROs of 1-year and 3-year tenor is given below.
Maturity Amount = P*[1+(r/100/n)]^{n*(t/365)}
1-year tenor:
Principal (P)= ₹1,00,00,000 Tenor (t) = 365 days (1 year), Rate (r) =5.15%
Maturity Amt
= 1,00,00,000 [1+(5.15/100/1)]^{1*(365/365)]
= 1,05,15,000
Interest = Maturity Amount – Principal
= 1,05,15,000 – 1,00,00,000
= 5,15,000
3-year tenor:
Principal (P)= ₹1,00,00,000, Tenor (t) = 1095 days (3 year), Rate (r) =5.15%, Frequency (n) = 1 (yearly)
Maturity Amt
= 1,00,00,000 [1+(5.15/100/1)]^{1*(1095/365)]
= 116,25,933.41
Interest = Maturity Amount – Principal
= 1,16,25,933.41 – 1,00,00,000
= 16,25,933.41
4. Should the securities offered as collateral cover the complete tenor of LTRO? Yes. The residual maturity of the securities offered as collateral under LTRO should be equal or more than the tenor of the LTRO at inception.
5. Whether the securities offered as collateral under LTRO can be substituted at a later date? Yes. The market participants can substitute securities offered as collateral in LTROs as many times as they wish to in terms of extant guidelines dated April 12, 2017 (Cir. Ref.: FMOD.MAOG.No.120/01.01.001/2016-17).
However, at any point of time, the residual maturity of replacement securities should not be less than the remaining tenor of the LTRO.
6. What are the margin requirements for securities to be offered as collateral for LTRO? The current margin requirements under LAF as per extant guidelines FMOD.MAOG No.125/01.01.001/2017-18 dated June 6, 2018 will also be applicable for LTROs.
7. Whether the collateral offered under LTROs will be subjected to variation margin? Yes. The securities offered as a collateral for LTROs will be marked to market on a quarterly basis, on the basis of latest prices published by Financial Benchmarks India Pvt. Ltd. (FBIL). The detailed guidelines in this regard will be issued separately.

Source:rbi.org.in; Economic Times; https://www.indianeconomy.net/splclassroom/what-is-long-term-repo-operations-ltros/; https://www.bloombergquint.com/business/rbis-long-term-repo-operations-seen-as-stealth-move-to-bring-down-rates

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