RAS question
The Long Term Repo Operation (LTRO) was introduced by RBI to:
Correct answer: (C) Provide durable liquidity at reasonable cost.
The RBI introduced Long Term Repo Operations to provide banks durable liquidity at a reasonable cost through funds linked to the fixed repo rate.
Explanation
LTRO was designed as a liquidity and transmission tool, not as a forex or deposit measure. It was introduced in February 2020 to give banks long-term funds of one to three years at the repo rate, supporting adequate liquidity during an economic slowdown. The RBI's own publication says it conducted five LTROs between February 17 and March 18, 2020 to reinforce monetary transmission and augment credit flows to productive sectors. These operations infused durable liquidity and gave banks funds at a reasonable cost, because the rate was the fixed repo rate rather than the higher prevailing market rates. That is why option C captures the purpose most precisely.
Why the other options are wrong
- (A) LTRO is a rupee liquidity operation for banks, linked to monetary transmission and credit flows, not regulation of the foreign exchange market.
- (B) Controlling inflation is not the stated purpose here, because LTRO injects long-term liquidity into the banking system at the repo rate rather than withdrawing liquidity to cool prices.
- (D) LTRO gives funds to banks so they can access durable liquidity and support credit flows; it is not a scheme to increase customer deposits in banks.
Concept
This tests RBI liquidity-management instruments under the monetary policy portion of Indian Economy. It recurs in RAS because candidates must distinguish policy-rate tools, liquidity operations and sector-specific measures such as TLTRO.