News Excerpt
To enable better transmission of its monetary policy, the Reserve Bank of India (RBI) has introduced Long Term Repo Operation (LTRO).
Pre-Connect

What is LTRO?
•    Under LTRO, RBI will conduct term repos of one to three-year tenure of appropriate sizes for up to a total amount of Rs 1 lakh crore at the policy repo rate. Under LTRO, RBI provides longer term (one to three year) loans to banks at the prevailing repo rate.
•    As banks get long-term funds at lower rates, their cost of funds falls. In turn, they reduce interest rates for borrowers. LTRO helped RBI ensure that banks reduce their marginal cost of funds-based lending rate, without reducing policy rates.
•    RBI said they will conduct LTRO from the fortnight beginning on February 15 at the policy rate.
•    It is a measure that market participants expect will bring down short-term rates and also boost investment in corporate bonds. These new measures coupled with RBI’s earlier introduced ‘Operation Twist’ are an attempt by the central bank to manage bond yields and push transmission of earlier rate cuts.

Analytica
Why did RBI introduce LTRO?RBI introduced LTRO to assure banks about the availability of durable liquidity at reasonable cost relative to prevailing market conditions and to further encourage banks to undertake maturity transformation smoothly and seamlessly so as to augment credit flows to productive sectors.
What was the immediate impact of LTRO?Shorter duration government bond yields plunged after the Reserve Bank of India announced Long Term Repo Operation.Besides lowering rates in the short end of the sovereign curve, LTRO is also likely to lower corporate bond yields, deposit rates and lending rates. It is a step towards credit transmission, and demonstrates RBI’s intent towards supporting growth.

Liquidity Adjustment Facility (LAF)    Marginal Standing Facility (MSF)
    It is a tool used in monetary policy, primarily by the RBI, that allows banks to borrow money through repurchase agreements (repos) or for banks to make loans to the RBI through reverse repo agreements.
    This arrangement manages liquidity pressures and assures basic stability in the financial markets.
    The RBI introduced the LAF as a result of the Narasimham Committee on Banking Sector Reforms (1998).
    Liquidity adjustment facilities are used to aid banks in resolving any short-term cash shortages during periods of economic instability or from any other form of stress caused by forces beyond their control.        It is an overnight liquidity support provided by RBI to commercial banks with a higher interest rate over the repo rate.
    MSF can be used by a bank after it exhausts its eligible security holdings for borrowing under other options like the LAF repo.
    Under MSF, banks can borrow funds from the RBI by pledging government securities within the limits of the SLR.
    Significance of MSF is that it can be availed even if the latter doesn’t have the required eligible securities above the SLR limit.
    The MSF was introduced by the RBI in its monetary policy for 2011-12 after successfully test firing it from December 2010 onwards.

PEPPER IT WITH
Repo, Reverse repo, policy rates, Base rate, PSBs,RRBs, SCBs, NHB, SIDBI

Conclusion
LTRO showed the market that RBI will not only rely on revising repo rates and conducting open market operations for its monetary policy, but also use new tools to achieve its intended objectives.