How does LTRO work?

RBI, LTRO, monetary policy, long-term repo operation, liquidity, policy rates

In the last monetary policy, instead of cutting the policy rates, the Reserve Bank of India (RBI) introduced a tool called long-term repo operation (LTRO) to inject liquidity in the system, as well as to ensure transmission of rates.

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.

LTRO also 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.