REPO → TLTRO, SLTRO, On-Tap Windows Flashcards
What is the repo rate, and how does it function as a monetary policy tool?
The repo rate is the interest rate at which the RBI lends overnight funds to commercial banks.
Monetary Policy Impact:
Lowering Repo Rate: Cheaper borrowing for banks -> encourages lending -> stimulates the economy.
Raising Repo Rate: More expensive borrowing for banks -> discourages lending -> slows down the economy.
Explain the concept of TLTROs. Why might the RBI focus TLTROs specifically on NBFCs?
TLTRO: Targeted Long-Term Repo Operations provide banks with long-term funds at attractive rates.
NBFC Focus:
NBFCs are crucial lenders to MSMEs (Micro, Small, Medium Enterprises) and the unorganized sector.
TLTROs ensure NBFCs have the resources to support these smaller businesses, which often struggle with traditional credit access.
What is the purpose of SLTROs, and how do they differ from standard TLTROs?
SLTRO: Special Liquidity Repo Operations address short-term liquidity needs specifically for small finance banks.
Difference:
SLTROs cater to the unique needs of small finance banks, which serve niche segments of the economy (micro/small industries, unorganized sector).
Describe the “On-Tap Liquidity Window” concept. How could this tool be used to encourage lending to specific sectors?
On-Tap Liquidity Windows: Provide banks with flexible access to funds when needed.
Targeted Lending: The RBI could offer better terms (e.g., lower interest rates) to banks that increase lending to contact-intensive sectors (tourism, hospitality) or healthcare, incentivizing support for these crucial areas.
How could the RBI use its reverse repo rate and the Liquidity Adjustment Facility (LAF) to promote specific types of lending?
Tiered Reverse Repo Rate: Banks that lend more to NBFCs, small businesses, healthcare, etc., could park their excess funds with the RBI at a slightly higher interest rate than the standard reverse repo rate. This creates a financial incentive for targeted lending.
Expanding the LAF: Including institutions like NABARD, SIDBI, EXIM Bank, and NHB in the LAF framework facilitates smooth liquidity management for sectors like agriculture, small industries, exports, and housing.
How did the RBI’s Repo Rate cut help during COVID-19 (Upto Feb 2022)?
Before COVID: The Repo Rate acts as a benchmark for banks’ interest rates. A higher Repo Rate discourages borrowing, slowing down economic activity.
During COVID: The RBI reduced the Repo Rate from 5.15% to 4.00%. This made borrowing cheaper for banks.
Impact: Cheaper loans from banks to businesses and individuals increased spending and investment, stimulating the economy affected by the pandemic.
How did Targeted Long-Term Repo Operations (TLTROs) address challenges during COVID-19 (Upto Feb 2022)?
Challenge: Specific sectors like NBFCs faced difficulty raising funds due to the pandemic.
Solution: TLTROs provided banks with cheap loans from RBI on condition they invest in bonds issued by NBFCs.
Impact: Increased liquidity for NBFCs, allowing them to lend to businesses crucial for economic recovery.
How did the RBI’s “On-Tap Liquidity Windows” help during COVID-19 (Upto Feb 2022)?
Impact of COVID: Sectors relying on close contact, like hospitality and healthcare, faced financial strain.
RBI’s Action: The bank introduced special windows for these sectors.
Banks could borrow funds at the Repo Rate for 3 years.
Healthcare Window: Funds had to be directed to hospitals, vaccine makers, etc.
Contact-Intensive Sectors Window: Loans had to be directed to businesses like hotels and restaurants.
Impact: Provided essential credit flow to sectors critical during the pandemic.
How did the RBI’s support for AIFIs help during COVID-19 (Upto Feb 2022)?
AIFIs Role: All India Financial Institutions (like NABARD, SIDBI) provide long-term financing to specific sectors like agriculture and small businesses.
Challenge during COVID: The pandemic threatened to disrupt AIFIs’ ability to support these crucial sectors.
RBI’s Action: The RBI provided AIFIs with significant funding.
Impact: Ensured continued financial support for sectors that play a vital role in the long-term health of the Indian economy.
