Recently our own Central Bank, the Reserve Bank of India has given boost to the economy by announcing certain measures like Targeted Long Term Repo Operations, bond purchases, a big 75 BPS cut of the Repo rate (mind you! Its big!) and so on.
What are these liquidity measures?
Long Term Repo Operations are a means to inject liquidity in the banking system by RBI wherein Banks can borrow from the RBI for long term periods (1 and 3 years) but surprise surprise, at an overnight repo rate!
Now, a point into consideration is that the long term rates are generally higher than short term rates and this is great measure by RBI to incentivise banks to cut down their lending rates too (because there is no free lunch!).
Now this is again important, as the yields have been rising and banks just cannot go and borrow in the debt market. Now why yields (interest you may earn on the security you purchase) have been rising? Due to the current uncertain investing environment, investors will be reluctant to invest in bonds! (less demand less price and hence more yield: prices and yields are indirectly related)
Okay, all understood. What else?
The RBI as already stated that it will start buying bonds in the open market. And what will this do? This will help the investors (generally banks) who hold bonds (generally government bonds) sell them and hold cash and hence lend this extra cash. (this is the broad idea).
Now comes a surprise, RBI also stated that for the first time they will also purchase corporate bonds while conduct these open market bond purchases. (Difficult times call for difficult measures).
This will also help with cash flows in the economy and will help stabilise the bond market, which already stated earlier, is suffering from rising yields.
Some Other Measures to Boost liquidity
- Ways Means and Advances: The WMA limit for the states has been enhanced to 1.2 lakh cr from 75k cr. This allows these states to borrow more money from the center in order to meet the temporary mismatches in their cash flows in these times of uncertainty.
- A 3 month moratorium has been offered on all term debt payments as a means to increase liquidity in the hands of the consumer. (The impact of the decision is debatable)
- Cash Reserve Ratio: The CRR limits for banks have been reduced by 1% to help increase their liquidity so that they can pass on this liquidity to consumers.
