Due to COVID-19 Pandemic world is facing unprecedented crisis both in terms of health & financially. India is also not immune to the crisis around globe. Recently, Reserve Bank of India (RBI) & Government of India have taken various steps for financial stability, among all steps one such step is Long Term Repo Operation and Reverse repo rate reduction by Reserve Bank of India which is discussed here in detail:

What is Long term repo operation (LTRO)?

Under Long term repo operation RBI provides long term loans ranging from 1 year to 3 years  to banks at prevailing repo rate so as to inject liquidity in the economy.

When these Long term repo operations are conducted for a specific set (i.e. Banks are required to invest funds in the specified instruments) then it is called as Targeted Long Term Repo Operations (TLTRO)

TLTRO by Reserve Bank of India:

TLTRO-1.0

To combat the liquidity crunch especially by corporate sector & NBFC, RBI on 27th March, 2020 announced auctions of TLTRO of 1 lakh crore of upto 3 year tenor  in tranches at a floating rate linked to to the policy repo rate.As banks get long term funds at lower rates, their cost of funds falls which in-turn helps to ensure that their lending rates (i.e MCLR) will fall.

Liquidity flowing to banks due to above TLTROs were required to be invested in:

  • Investment grade corporate bonds
  • Commercial paper
  • Non Convertible Debentures

50% was required to be acquired from Primary market  and remaining 50% from secondary market including from mutual funds and NBFCs.

TLTRO 2.0

On 17th April,2020 RBI announced auctions of TLTRO of 50,000  crore of upto 3 year tenor  in tranches at a floating rate linked to to the policy repo rate.

Liquidity flowing to banks due to above TLTROs were required to be invested in: Investment grade bonds, commercial paper (CPs) and non-convertible debentures (NCDs) of Non-Banking Financial Companies (NBFCs). However at least 50 % shall be invested in:

  • 10% in securities/instruments issued by Micro Finance Institutions (MFIs)
  • 15% in securities/instruments issued by NBFCs with asset size of ₹ 500 crore and below
  • 25% in securities/instruments issued by NBFCs with assets size between ₹ 500 crores and ₹ 5,000 crores.

We can say that TLTRO 2.0 was targeted towards providing relief to NBFCs due to liquidity crunch faced by them because of extended lock-down.

Result of TLTRO auction by RBI:

Results of auction of TLTRO by RBI so far are summarised as below:

TLTRO 1.0
Date of announcement Amount in Crore Tenor Bids  in Crore Allotment in crore % of amount issued Time Limit for Investment by Banks
27-03-2020 25000 3 Years 60500 25009 100.04% 15 Days
03-04-2020 25000 3 Years 99760 25016 100.06% 30 Days
09-04-2020 25000 3 Years 113470 25016 100.06% 30 Days
17-04-2020 25000 3 Years 61415 25009 100.04% 30 Days
Total 335145 100050

TLTRO 1.0 saw a amazing response resulting in injecting an amount of Rs 1 lakh crore in the economy.

TLTRO 2.0
Date of announcement Amount in Crore Tenor Bids  in Crore Allotment in crore % of amount issued Time Limit for Investment by Banks
23-04-2020 25000 3 Years 12850 12850 51.40% 30 Days
Total 12850 12850

While TLTRO 1.0 was oversubscribed by more than 3 times (including all tranches) TLTRO 2.0 focusing mainly on funding to NBFCs, tranche-1 of Rs 25000 Crore  saw a cold response resulting in issuance of  only Rs 12850 crore by RBI. Second tranche of 25000 crore is still pending as on date.

Reverse Repo Action by RBI:

Reverse repo is the rate at which RBI borrows from bank or Bank keeps their idle funds with RBI. To inject liquidity in the economy RBI tends to keep low reverse repo rate so that banks do not keep their funds with RBI.

On 27th March,2020 RBI announced a cut 0f 90 basis points in reverse repo rate which reduced reverse repo from  4.9% to 4.0%. At that time approx Rs 2.86 lakh crore (daily average from March 1 to March 25,2020) were with RBI under reverse repo operations.

However on 15th April,2020 the amount under reverse repo rate increased to Rs 6.9 lakh crore which further led to reduction by 25 basis points in reverse repo rate to 3.75% by RBI to discourage banks from keeping their money idle with RBI.

Even after reducing reverse repo rate by RBI to 3.75% , banks are continuously depositing their funds with RBI , after 15th April,2020 amount under reverse repo increased to 7.21 lakh crore reflecting that at present banks are considering as risky to lend or invest.

Above are only few measures for inducing liquidity in the economy , there are several other steps taken by RBI to induce liquidity and provide financial stability like Moratorium period , CRR , SLR , Repo actions, Money market operations etc having combined effect on economy.

TLTRO-1.0 https://taxguru.in/rbi/rbi-reduces-repo-rate-reverse-repo-rate-75-90-basis-points.html

TLTRO-2.0 https://taxguru.in/rbi/rbi-governors-statement-april-17-2020-relief-covid-19.html

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Qualification: Student - CA/CS/CMA
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Location: Raipur, Chhattisgarh, IN
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One Comment

  1. AMIT CHANDRA SHARMA says:

    Very good insight about Repo Operations by Reserve Bank of India. Very well explained. You should write very often and to newsletter even.

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