The Reserve Bank of India (RBI) has decided to introduce long-term repo operations (LTRO) to facilitate the transmission of monetary policy actions and flow of credit to the economy. The central bank will conduct long-term repos of one- and three-year tenors of appropriate sizes for up to a total amount of Rs 1,00,000 crore at the policy repo rate from the fortnight beginning February 15, 2020.
“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. This should encourage banks to undertake maturity transformation smoothly and seamlessly so as to augment credit flows to productive sectors,” RBI Governor Shaktikanta Das said.
“It is an effort to ensure better monetary policy transmission because we are giving the funds at the policy rate. We want to inject Rs 1 lakh crore into the banking system that will enable banks to reduce their lending rates,” Das said.
The RBI has been increasingly focusing on improving monetary transmission, especially with respect to bank credit to productive sectors. “This is a bold measure and should definitely help banks to kickstart credit growth in these tenors and help to reduce their cost/improve margins. This measure has led to a sharper rally in the short end of the gilt yield curve post-policy where yields have fallen in the 2-4 year segment by 10 to 15 basis points, said Bekxy Kuriakose, head-fixed income, Principal Mutual Fund.
Lakshmi Iyer, CIO (debt) & head of products, Kotak Mahindra AMC, said: “The masterstroke by the RBI is announcement of LTRO of one- and three-year tenors for up to Rs 1 lakh crore at the repo rate. This is a step towards credit transmission and demonstrates the RBI’s intent towards supporting growth.”
After the introduction of the external benchmark system, most banks have linked their lending rates for housing, personal and micro and small enterprises (MSEs) to the policy repo rate of the RBI. During October-December 2019, the weighted average lending rate (WALR) of domestic (public and private sector) banks on fresh rupee loans declined by 18 basis points (bps) for housing loans, 87 bps for vehicle loans and 23 bps for loans to micro, small and medium enterprises (MSMEs).
While the RBI slashed repo rate by 135 points in calendar year 2019, the 1-year median marginal cost of funds-based lending rate (MCLR) declined by only 55 bps during February 2019 and January 2020. The WALR on fresh rupee loans sanctioned by banks declined by 69 bps and the WALR on outstanding rupee loans by 13 bps during February-December 2019.
Monetary transmission across various money market segments and the private corporate bond market has been sizable. As against the cumulative reduction in the policy repo rate by 135 bps since February 2019, transmission to various money and corporate debt market segments up to January 31, 2020 ranged from 146 bps (overnight call money market) to 190 bps (3-month CPs of non-banking finance companies), the RBI said.
The RBI has decided to link pricing of loans by scheduled commercial banks for the medium enterprises to an external benchmark like the repo rate with effect April 1, 2020.
All new floating rate personal or retail loans and floating rate loans to micro and small enterprises extended by banks were linked to external benchmarks — the policy repo rate or any benchmark market interest rate produced by the Financial Benchmarks India, including Treasury bill rates — from October 1, 2019. “Subsequent to the introduction of an external benchmark system, the monetary transmission has improved to the sectors where new floating rate loans have been linked to the external benchmark,” it said.