3 year Long Term Repo of Rs. 25,000 cr. goes through at 5.15%. Banks can now simply buy GSecs of 25,000 cr. for three years maturity or more, paying for them by borrowing at 5.15% from the RBI.
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Repo is when banks take money from the RBI at 5.15% and give the central bank securities instead. The securities offered are pristine, usually, so banks give government bonds.
In a 3 year repo, the bonds need to have a (remaining) maturity of three years or more.
In a 3 year repo, the bonds need to have a (remaining) maturity of three years or more.
The 2024 bond (which meets the criteria) is trading today at about 5.94% yield. Also, the 2023 is at 5.77% 
For a 2023 or 2024 bond, the margin is only 1% - so if they borrow worth Rs. 100 they need to give securities worth Rs. 101.
Assuming they borrow the Rs.100 and put the Rs. 1 from their pocket, they'll make roughly Rs. 0.6 (0.6%) in terms of diff between yield of GSec vs repo
Assuming they borrow the Rs.100 and put the Rs. 1 from their pocket, they'll make roughly Rs. 0.6 (0.6%) in terms of diff between yield of GSec vs repo
Making Rs. 0.6 when you have to only invest Rs. 1 = 60% return on equity.
Banks get this free! Why? Here's one reason: The RBI wants banks to cut interest rates.
Banks get this free! Why? Here's one reason: The RBI wants banks to cut interest rates.
Free money opportunities will dilute fast, so all the 2023/2024 government bonds will see price rises as more LTROs come by, meaning their yields will come closer to the 5.15% levels.
If banks buy up all the short term govt bonds, what happens?
If banks buy up all the short term govt bonds, what happens?
Mutual funds, insurers etc. have to either buy long term govt bonds, or go buy corporate bonds. If they do that, those bonds will see a rise in price, and thus, lower interest yields.
Effectively the bond market will see lower rates for longer term GSecs, or for corporate bonds
Effectively the bond market will see lower rates for longer term GSecs, or for corporate bonds
This is a way to push banks to lower rates, but as we've seen, bond market rates, even for corporates, are already abysmally low.
The problem with rates is for retail loans which is determined by MCLR. And no bank wants to cut that too much because all existing biz gets repriced
The problem with rates is for retail loans which is determined by MCLR. And no bank wants to cut that too much because all existing biz gets repriced
So while this LTRO is a good reason to cheer (and will help bank balance sheets) it's going to only help thebond market, but not retail interest rates.
And yes, I want that free money too so I wish I had a bank today.
And yes, I want that free money too so I wish I had a bank today.
