Citing near-total success with the many unconventional monetary policy tools it has put in place to insulate the economy from the devastating impacts of the pandemic since last February, an RBI document has said that going forward, direct OMOs along with Operation Twists They will still be powerful. tools in the central bank’s arsenal.
The March edition of the RBI bulletin published on Friday said that the success of OTs (Operation Twists) combined with the injection of liquidity through OMOs (Open Market Operations) have moderated returns on government securities and reduced the cost of borrowing for the government.
The simultaneous buying and selling of government securities under OMO is popularly known as Operation Twist. It involves buying long-term debt while selling short-term bonds to keep borrowing costs down.
“Overall, the proactive measures undertaken by the RBI during the pandemic have laid the groundwork for the economic recovery to gain momentum and move forward.
“Overall, these measures have had a sobering impact on yields and risk spreads, helping to ease market stress and ease financial conditions,” the RBI house economists’ paper said.
The various unconventional monetary policy tools implemented by the monetary authority in the wake of the pandemic include the repo rate cuts of 115 basis points (bps) in two installments, the CRR reduction of 100 bps in one fell swoop and many unconventional measures.
These include extended loans or term financing operations, including liquidity support through refinancing; asset purchase programs, including Operation Twists; and forward guidance to assure the market that the RBI will stand with them and do whatever it takes to put out the fire.
Liquidity support operations included extended loans/term financing through long-term repo operations (LTROs) in February 2020 to facilitate the transmission of monetary policy and support borrowing.
Under the scheme, the Reserve Bank provided long-term liquidity to banks at the previous policy repurchase rate (5.15 percent), lower than prevailing market rates and the cost of bank’s own deposits. banks to reduce the cost of funds.
During February-March 2020, five LTROs of Rs 25,000 crore each with a term of 1 year and four with a term of 3 years were made, which increased the liquidity of the system by Rs 1,25,117 crore, the newspaper said. .
But by September 2020, banks reimbursed Rs 1,23,572 crore (98.8% of available funds) to reduce the cost of funds by exercising a prepayment option before maturity.
“An event study analysis found that LTROs had a significant impact on G-sec yields of some maturities,” the paper said.
Specific long-term repos (TLTROs) were then introduced to provide liquidity to specific sectors and entities under stress.
Accordingly, four TLTROs of Rs 25,000 crore each with a term of three years were held during March-April 2020, providing Rs 1,00,050 crore to banks for implementation in investment grade corporate bonds. , commercial paper and non-convertible obligations.
Since TLTRO funds were largely limited to primary issuances by public sector entities and large companies, a version two of the TLTRO was introduced to provide relief to small and medium-sized companies, including NBFCs and MFIs.
However, demand was lukewarm at Rs 12,850 crore, reflecting the market’s lack of appetite for additional liquidity, and in November, banks returned Rs 37,348 crore of TLTRO funds (33.1 per cent of the amount available) under a scheme similar to the prepaid LTRO. .
Again, as the liquidity measures concentrated on reviving specific sectors that have multiplier effects on growth, next was the TLTRO which was introduced in October 2020 for a total amount of up to Rs 1,00,000 crore with terms of up to three years at a floating rate linked to the repo rate.
Subsequently, 26 stressed sectors identified by the KV Kamath committee were brought under the scope of this scheme in December, which was further expanded to include bank loans to NBFCs in February 2021.
Rs 75,000 crore was then given to domestic financial institutions to help them raise resources.
To alleviate their liquidity stress and meet the credit needs of the sector, they were granted special refinancing facilities. This included Rs 60,000 crore for Nabard and Rs 15,000 crore each for Sidbi and NHB and a credit line of Rs 15,000 crore for Exim Bank.
To alleviate bailout pressures on MFs emanating from the closure of some debt MFs and minimize their potential contagion effects, a special liquidity facility for Rs 50,000 crore was introduced for them in April 2020, but only Rs 2,430 crore was withdrawn. .
These operations were intended to compress the term premium and reduce the slope of the yield curve. And until the end of February, the Reserve Bank has made 20 such operations of Rs 10,000 crore each.
“Empirical evidence suggests that OTs had a significant impact on G-sec yields of some maturities around announcement days.
“Induced by lower rates, corporate bond issuance reached a record level of Rs 6.4 lakh crore until January this fiscal year compared to Rs 5.3 lakh crore a year ago, which represents an increase of 20 .2 percent,” the document concludes.
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