The Reserve bank of India had announced a series of measures last month to soften yield on the 10-year G-Sec and reduce cost funds of banks. Aside from announcing two additional tranches of ‘Operation Twist’ (OT), and easing held-to-maturity (HTM) limits for bond holdings by banks, The RBI had also allowed banks to retire higher cost borrowings availed by them under previous long term repo operations (LTROs).

To lower their cost of funds, many banks that had borrowed funds under LTRO (Long Term Repo Operations) in February and March, at a Repo rate of 5.15%, have made a beeline to retire these borrowings. The repayments of these borrowings covered over five tranches. In the first four tranches, banks have returned Rs. 98,854 crore so far. The last repayment of funds scheduled for today. Banks can in turn avail funds at the current Repo rate of 4%.

This will help lower the bank’s cost of funds, but will also lead to an increase in liquidity in the banking system that is already flush with funds. Over the past three months, there has been Rs. 6-7 lakh crore of surplus liquidity in the system. With banks returning over Rs. 1 lakh crore of funds, there will be more headroom for The RBI to Conduct OMOs.