The central bank doesn’t disclose its foreign exchange management strategy, but it was evident in the last few years that the rupee was not allowed to appreciate despite healthy inflows, resulting in a rapid build-up of foreign exchange. From a low of $275 billion in September of 2013, when rupee came under severe pressure due to so-called ‗taper tantrums‘ by the US Federal Reserve, India now has record foreign exchange reserves of [1] billion, as on 21 August — a 95 per cent rise over seven years. Despite the Covid-19 pandemic, the foreign exchange kitty swelled by $62 billion since March. In this seven-year period, rupee ended the year with an appreciation against the dollar only once — in 2017. This year, the rupee is so far down by 2.04 per cent against the dollar. The latest RBI statement suggested that it is not uncomfortable with the appreciation in rupee, confirming the speculation among currency analysts that a departure was made in the exchange management policy.
The Reserve Bank of India (RBI) said that it will conduct liquidity operations worth Rs 20,000 crore in two tranches through sale and purchase of government securities (G-Secs). The two open market operations (OMOs) of Rs 10,000 crore each will be conducted on September 10 and 17, the central bank said in an official release. This is now the second such announcement in as many weeks. Last week, RBI had announced sale and purchase of G-Secs worth Rs 20,000 crore, in two tranches, slated to be conducted on August 27 and September 3. In another move, RBI announced the infusion of Rs 1 lakh crore in mid-September through long-term repo operations (LTROs) at floating rates, or the prevailing repo rate. Moreover, the central bank also gave an option to lenders who have earlier availed funds through LTROs, to reverse their transactions before maturity.
Source: Excerpt taken from the Print.in, written by Manojit Saha. (Dated 2nd September, 2020.)
Which of the following statements relate to the Long Term Repo Operations as measure to support the economy in corona pandemic situations?
Correct Answer :
All of the above.
Solution :
The correct answer is All of the above.
Step-by-step Explanation:
Long Term Repo Operations (LTRO) were introduced by the Reserve Bank of India (RBI) as a key monetary policy tool to provide liquidity support and stimulate credit flow during economic downturns, such as the COVID-19 pandemic.
Let us analyze each of the given statements to understand their relevance:
1. Impact on interest rates and corporate bonds: Under LTRO, the RBI provides long-term funds to banks at the prevailing repo rate. Access to lower-cost long-term funds helps bring down short-term interest rates and reduces borrowing costs for banks, thereby encouraging investments in instruments such as corporate bonds.
2. Maturity transformation and credit flow: LTRO provides banks with liquidity for longer tenors (typically 1 to 3 years) at a lower rate. This enables banks to perform maturity transformation—matching their long-term lending obligations with stable funding—without exposing themselves to severe asset-liability mismatches, thus augmenting credit flow to productive sectors of the economy.
3. Liquidity enhancement: As stated in the provided text excerpt, the RBI announced the infusion of Rs 1 lakh crore (Rs 1 trillion) through LTROs to enhance liquidity in the banking system.
Since all the individual statements accurately describe the functions and goals of the Long Term Repo Operations during the pandemic, the option All of the above is correct.
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