RBI to conduct first repo operation on February 17 for Rs 25,000 crore

RBI, in its statement said, LTRO conducted under the scheme will be in addition to the existing LAF and MSF

The Reserve Bank of India (RBI) announced on Friday that it will conduct its first-ever long-term repo operations (LTROs) on February 17 of Rs 25,000 crore for three years, followed by a one-year LTROs of an equivalent amount on February 24.

In the monetary policy on Thursday, the RBI said it will conduct LTRO of up to Rs 1 trillion in various sizes. The idea is to give money to banks at repo rate for one and three years so that they don’t return the money the next day in the overnight window and lend it instead.

This measure, along with giving relief on cash reserve ratio (CRR) maintenance, will help bring down lending rate in the banking system, the RBI hoped. Following the measures in the policy, three-year bond yields had dropped 19 basis points as banks get cheaper money through the LTRO window.

LTROs have been used by the European Central Bank (ECB) since March 2008 to fight the financial crisis there. In June 2009, ECB announced 12-month LTRO and in Dece­mber 2011, it brought in three-year LTRO. The instruments were hugely popular with banks, and the ECB did close to ^490 billion of such operations. However, the long-term efficacy of the instruments remained unclear.

The RBI, in its statement said, LTRO conducted under the scheme will be in addition to the existing liquidity adjustment facility (LAF) and marginal standing facility (MSF). The operations will be 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,” the RBI said in a statement. In case of over-subscription, the allotment will be done on pro-rata basis, the RBI said. The minimum bid amount would be Rs 1 crore and multiples thereof. The eligible collateral for LTROs and the applicable haircuts will remain the same as applicable for LAF, the RBI said.