In a bid to strengthen the liquidity position of the financial system, the Reserve Bank of India (RBI) has decided to conduct long-term repo to the tune of Rs 1 lakh crore.
"It has been decided that from the fortnight beginning on February 15, 2020, the Reserve Bank shall conduct term repos of one-year and three-year tenors of appropriate sizes for up to a total amount of Rs 1,00,000 crore at the policy repo rate. Details about the LTRO facility are being issued separately," the central bank said.
A repurchase agreement (repo), usually, is a form of short-term borrowing for dealers in government securities. In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price. That small difference in price is the implicit overnight interest rate. Repos are typically used to raise short-term capital. They are also a common tool of central bank open market operations.
Even as the liquidity has been surplus in the financial system since the end of Lok Sabha Election 2019, market players have been long complaining about the fact that the liquidity surplus is lopsided in favour of only few participants in the financial system. Liquidity refers to the availability of funds in the financial system.
The central bank has also decided to fine-tune the existing liquidity management framework. According to the framework, the instruments of liquidity management will include fixed and variable rate repo/reverse repo auctions, outright open market operations (OMOs), forex swaps and other instruments may be deployed from time-to-time to ensure that the system has adequate liquidity at all times.