RBI revises its liquidity management framework: LTRO introduced in place of 14 days fixed term repo

As announced in the Statement on Developmental and Regulatory Policies of February 6, 2020, the Reserve Bank of India has decided to revise its liquidity management through which it controls cash in the banking system to rationalise interest rates in line with the policy actions. Instruments of liquidity management will include “fixed and variable rate repo/reverse repo auctions, outright open market operations (OMOs), forex swaps and other instruments as may be deployed from time to time to ensure that the system has adequate liquidity at all times,” the statement said.

 The RBI notification said that from the fortnight beginning February 15, the daily fixed rate repo and four 14-day term repos every fortnight being conducted, at present, are being withdrawn. While getting rid of the 14 days fixed repo, the RBI said it will operate a 14-day term repo/reverse repo operation at a variable rate that would be conducted to coincide with the cash reserve ratio (CRR) maintenance cycle. This would be the “main liquidity management tool for managing frictional liquidity requirements.”

The weighted average call rate (WACR) will remain the operating target of the monetary policy, which means it will ensure enough liquidity to anchor the call rate at around the repo rate. This means if the call rate inches above the repo rate, it would signal liquidity deficit and the central bank will bring its tools to infuse liquidity. Likewise, if the call rate is below the repo rate that would mean the banking system has surplus liquidity. In that case, the central bank can operate to suck out the liquidity through its operations, it added.

The   Long Term Repo Operations (LTROs) conducted under this scheme will be in addition to the existing LAF and MSF operations. The total amount of liquidity injected through these LTRO operations would be of appropriate sizes up to Rs.1,00,000 crore.  The Central Bank has also retained the weighted average call rate as the single operating target. The liquidity management corridor is retained with the marginal standing facility (MSF) rate as its upper bound and the fixed-rate reverse repo rate as the lower bound, with the policy repo rate in the middle of the corridor. The width of the corridor remains unchanged at 50 basis points – the reverse repo rate being 25 basis points below the repo rate and the MSF rate 25 basis points above the repo rate.

Operational guidelines of LTRO:

The fixed-rate LTROs will be conducted on CBS (E-KUBER) platform.  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 the policy rate will be rejected.    In case of over-subscription of the notified amount, the allotment will be done on a pro-rata basis. RBI will, however, reserve the right to inject a marginally higher amount than the notified amount due to rounding effects.    The minimum bid amount would be Rupees one crore and multiples thereof. The allotment would be in multiples of Rupees one crore. “There will be no restriction on the maximum amount of bidding by individual bidders. However, in the case of over-subscription of the notified amount, the allotment will be done on a pro-rata basis. RBI may allow marginally higher amounts than the notified amount due to rounding effects. The notification further said that the eligible collateral for LTROs and the applicable haircuts will remain the same as applicable for LAF. The reversal of these operations would take place at the ‘start of day’ on the day of maturity.