RBI on Thursday announced in its monetary policy that it 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. This means banks would be able to borrow one-year and three-year tenor money at just the policy repo rate, that currently stands at 5.15%.
“Since June 2019, RBI 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 said.
Experts pointed out that though the downward movement in short-term yields is a positive, only time would tell whether banks would use this opportunity for incremental lending. That too, at a time when risk aversion remains a top priority for lenders who are of the view that good avenues to lend are limited. What reflects their belief is the fact that banks’ investment in central government and state government securities have gone up by over 10% to Rs 37.02 lakh crore as on January end against last year.
SPJIMR professor-finance Ananth Narayan said the impact of LTRO announcement is akin to an elephant sitting down on short-term yields. “Three-year bonds at 6% can be repo-ed with RBI at 5.15%. This would drag down three-year bond yields, which were at 6%, closer towards repo rate of 5.15%. This will even bring down yields in the longer end of the GOI curve. In many ways, this is even more bullish than a rate cut for the GOI curve. The drop in near-term and overall government bond yields should also transmit into borrowing rates,” he said.
Independent market MS Gopikrishnan expert said this measure will mean infusion of additional liquidity in the system, but may not necessarily lead to increased lending by banks as that will depend on the risk appetite of the banks and credit worthiness of the borrowers.
RBI has also said it is withdrawing the daily fixed rate repo and four 14-day term repos being conducted every fortnight. RBI did mention it will ensure adequate provision/absorption of liquidity as warranted by underlying and evolving market conditions — unrestricted by quantitative ceilings — at or around the policy rate.
Market players say this will put pressure on banks to think about liquidity management more pro-actively rather than depend on RBI. “The decision to withdraw its overnight fixed rate repo operations could bring in more volatility in overnight call money markets,” Gopikrishnan added.