Liquidity infusion via LTRO, TLTRO bring down financing cost in corporate bond market to decadal low: RBI

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Published: July 14, 2020 2:45 PM

In the months when deployment of funds availed by banks under LTROs/ TLTROs was underway, even non-AAA rated entities were able to access the market.

RBI, reserve bank of indiaRBI deployed several conventional and unconventional tools to restore orderly conditions in financial markets and maintain the normal functioning of financial intermediaries

The abundant surplus liquidity in the system provided by the Reserve Bank amid COVID-19 related dislocations in the financial market has helped reduce financing cost in the corporate bond market to decadal lows, according to an article published in the RBI Bulletin. The article has been prepared by Radha Shyam Ratho and Pradeep Kumar of the Financial Markets Operations Department of Reserve Bank of India (RBI).

RBI deployed several conventional and unconventional tools to restore orderly conditions in financial markets and maintain the normal functioning of financial intermediaries, the article published in RBI’s monthly bulletin for July showed. “Abundant liquidity provided through generic (LTROs) as well as targeted instruments (TLTROs), and other policy measures announced by RBI in the backdrop of dislocations observed in the financial markets, have brought down financing costs in the corporate bond market to decadal lows, eased the access of non-AAA rated entities, and led to record primary issuances,” the article said.

Yields have dropped and the spreads have compressed despite foreign portfolio investment (FPI) outflows of around USD 3 billion from corporate bonds in 2020, it said. Over the past few months, RBI infused liquidity through long-term repo operations (LTROs), targeted long term repo operations (TLTROs), TLTRO 2.0, special refinance facilities to NABARD, SIDBI, NHB and Exim Bank, and a special liquidity facility for mutual funds.

On Saturday, RBI Governor Shaktikanta Das said the liquidity measures announced by the central since February 2020 aggregate to about Rs 9.57 lakh crore, which is equivalent to about 4.7 per cent of 2019-20 nominal gross domestic product (GDP).

The article further said the current level of surplus liquidity in the system has ensured that the short-term rates have remained anchored and soft relative to the policy repo rate, aiding monetary policy transmission with positive spillovers to other segments of the market spectrum.

While the corporate bond market in the country has traditionally been a bastion of AAA-rated entities, the stylised evidence suggests that the recent RBI measures were successful in rekindling the investors’ risk appetite, it said.

In the months when deployment of funds availed by banks under LTROs/ TLTROs was underway, even non-AAA rated entities were able to access the market.

In February 2020, when the LTROs were conducted, the share of non-AAA-rated issuances increased to 19 per cent from 11 per cent in January 2020. Similarly, when deployment of TLTRO funds was underway in April-May 2020, the share of non-AAA-rated issuances was higher, it said.

The funds availed under TLTRO 2.0 were deployed in investment-grade bonds, commercial papers and non-convertible debentures of non-banking finance companies, which led to a further improvement in the share of non-AAA rated borrowers to 25 per cent in June from 19 per cent in May 2020, the article said

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