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OMOs, Operation Twist potent tools in central bank’s arsenal: RBI paper
KV Prasad Jun 13, 2022, 06:35 AM IST (Published)
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Summary
The March issue of the RBI Bulletin released on Friday said the success of OTs (Operation Twists) combined with liquidity injection through outright OMOs (open market operations) have moderated the yields on government securities and has reduced the cost of borrowing for the government.
Citing near-total success with the many unconventional monetary policy tools it has deployed to insulate the economy from the ravaging impacts of the pandemic since last February, an RBI paper has said going ahead too, outright OMOs along with Operation Twists will continue to be potent tools in the central bank’s arsenal.
The March issue of the RBI Bulletin released on Friday said the success of OTs (Operation Twists) combined with liquidity injection through outright OMOs (open market operations) have moderated the yields on government securities and has reduced the cost of borrowing for the government.
Simultaneous purchase and sale of government securities under OMOs are popularly known as Operation Twist. It involves buying long-end debt while selling short-tenor bonds to keep borrowing costs down.
“Overall, the proactive measures undertaken by the RBI during the pandemic have laid the foundations for economic recovery to gain momentum, going ahead. “Overall, these measures have had a sobering impact on yields and risk spreads, which have helped in easing market stress and softening financing conditions,” the paper by RBI house economists said.
The several unconventional monetary policy tools deployed by the monetary authority in the wake of the pandemic include the 115 basis points (bps) repo rate cuts in two installments, 100 bps CRR reduction at one go and many unconventional measures.
These include extended lending or term-funding operations including liquidity support through refinance; asset purchase programmes including Operation Twists; and the forward guidance to assure the market that the RBI will stand by with them and do whatever it takes to put out the fire.
Liquidity support operations included extended lending/term-funding through long term repo operations (LTROs) in February 2020 to facilitate monetary policy transmission and support credit offtake.
Under the scheme, the Reserve Bank provided long-term liquidity to banks at the erstwhile policy repo rate (5.15 per cent), lower than the prevailing market rates and banks’ own deposit cost to lower their cost of funds.
During February-March 2020, five LTROs of Rs 25,000 crore each with one of 1-year tenor and four of 3-year tenors were conducted, which augmented system liquidity by Rs 1,25,117 crore, the paper said.
But by September 2020, banks repaid Rs 1,23,572 crore (98.8 per cent of the funds availed) to reduce their cost of funds by exercising an option of prepayment before maturity.
“An event study analysis has found that the LTROs had a significant impact on G-sec yields of some maturities,” said the paper. Then targeted long-term repo operations (TLTROs) were introduced to provide liquidity to specific sectors and entities under stress.
Accordingly, four TLTROs of Rs 25,000 crore each of three years tenor were conducted during March-April 2020 providing Rs 1,00,050 crore to banks for deployment in investment-grade corporate bonds, commercial papers and non-convertible debentures.
Since the TLTRO funds were largely confined to primary issuances of public sector entities and large corporates, version two of the TLTRO was introduced to provide relief to the small and mid-sized corporates, including NBFCs and MFIs.
The demand, however, was lukewarm at Rs 12,850 crore, reflecting a lack of market appetite for additional liquidity and by November, banks returned Rs 37,348 crore of TLTRO funds (33.1 percent of the availed amount) under a scheme similar to the prepayment of LTROs.
Again as liquidity measures were concentrated on reviving specific sectors that have multiplier effects on growth, the next was on tap TLTRO which was introduced in October 2020 for a total amount of up to Rs 1,00,000 crore with tenors of up to three years at a floating rate linked to the repo rate.
Subsequently, 26 stressed sectors identified by the K V Kamath committee were brought within the ambit of this scheme in December, which was further expanded to include bank lending to NBFCs in February 2021.
Then Rs 75,000 crore was extended to the national financial institutions to help them raise resources. To alleviate their liquidity stress and meet sectoral credit needs, special refinance facilities were provided to them.
This included Rs 60,000 crore to Nabard and Rs 15,000 crore each to Sidbi and NHB and a line of credit of Rs 15,000 crore to the Exim Bank. To ease redemption pressures on MFs emanating from closure of some debt MFs and minimise their potential contagious effects, a special liquidity facility for Rs 50,000 crore was introduced in April 2020 for them but only Rs 2,430 crore were drawn down.
These operations were aimed at compressing the term premium and reducing the steepness of the yield curve. And up to the end-February, the Reserve Bank has conducted 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 the lower rates, corporate bond issuance reached a record level of Rs 6.4 lakh crore in till January this fiscal compared to Rs 5.3 lakh crore a year ago, which is an increase of 20.2 percent,” concludes the paper.
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