RBI Issues FAQs On Long-Term Repo Programme
The Reserve Bank of India will conduct its first long-term repo operation on Feb.17. The instrument, which was announced during the last monetary policy review meet, will be used to provide Rs 1 lakh crore in liquidity at fixed rates to banks.
The RBI will conduct LTRO auctions of up to Rs 25,000 crore on Feb. 17 with a maturity of three years and thereafter, it will conduct another similar auction on Feb. 24, with a maturity of one-year, it said in a release last week.
The central bank, in a statement today, listed frequently-asked questions giving details about the LTRO facility.
What is the maximum amount that a single market participant can bid?
Market participants can bid an amount less than or equal to the notified amount, while it may reject all bids made by the participant if the total bid amount submitted by the participant exceeds the notified amount.
When are interest payments required to be made?
The interest payments will have to made on the date of maturity of the LTRO—or the reversal date.
How will the interest be calculated?
The LTROs will be conducted on a fixed-rate basis and the rate will remain fixed for the tenor of the operation and will be compounded on an annual basis. The rate of interest will be fixed at the prevailing repo rate of 5.15 percent.
For instance, if a winning bidder makes an offer of Rs 1 crore, he/she will pay Rs 5.15 lakh as interest on the date of maturity of the instrument in the case of the one-year LTRO (or 365 days). Under the three-year LTRO (or 1095 days), the winning bidder will pay nearly Rs 16.25 lakh as interest on the date of maturity.
Should the securities offered as collateral cover the complete tenor of LTRO?
The residual maturity of the securities provided by market participants as collateral under the LTRO window should be equal to or more than the tenor of the LTRO at inception.
Can the securities offered as collateral be substituted later?
Market participants can substitute securities offered as collateral in LTROs as many times as they wish to, if the residual maturity of the replacement securities is not less than the remaining tenor of the LTRO.
What are the margin requirements for securities to be offered as collateral?
Existing margin requirements under the liquidity adjustment facility that apply to treasury bills, central government bonds and state development loans will cover the LTRO window.
According to the RBI’s June 2018 circular on margin requirements under the liquidity adjustment facility for treasury bills and government securities that are provided as collateral for a period of 1-5 years, the margin requirement stands at 1 percent of the residual maturity of the collateral.
While for state development loans that are provided as collateral for 1-5 years, the margin requirement for unrated loans is 3 percent and for rated state development loans is 2 percent of the residual maturity of the collateral.
Will the collateral offered under LTROs be subjected to variation margin?
Securities offered as collateral under the LTRO facility will be marked to market on a quarterly basis. This mark to market adjustment will be based on the latest prices published by the Financial Benchmarks India Pvt. Ltd.
Detailed guidelines on the adjustment will be issued separately, the RBI said.