Long term repo ops helped bring short-tenor NBFC bond spreads down by over 200 bps

Under the TLTRO scheme, the RBI conducted term repo auctions of up to 3-year tenor for a total amount of Rs 1 lakh crore.

The targeted long term repo operations (TLTRO) conducted by the Reserve Bank of India (RBI) has helped bring down spreads on short term corporate bonds of non-banking financial companies (NBFCs) by over 200 basis points, according to the financial stability report released by the central bank on Friday.

Under the TLTRO scheme, the RBI conducted term repo auctions of up to 3-year tenor for a total amount of Rs 1 lakh crore. The funds borrowed under this scheme had to be invested in corporate bonds, commercial papers and non-convertible debentures. Indeed, the corporate bond market had faced severe liquidity issues in March with significant widening of corporate bond spreads. With the central bank’s liquidity operations, there was renewed activity, at least, in the short tenor bonds as banks looked to deploy the funds from the TLTROs.

“The spread of 3-year AAA-rated corporate bond over similar tenor government securities has decreased from 320 bps on March 26, 2020 to 114 bps on June 26, 2020 for NBFCs. Lower borrowing costs, coupled with deployment of TLTRO funds, have led to record primary issuance of corporate bonds of Rs 2.09 lakh crore in the first quarter of 2020-21,” the RBI stated. With private placement of bonds seeing significant traction, bond issuances during the first quarter of fiscal year 2021 rose by over 28% compared to the same period last year.

Prior to the TLTROs, the central bank had introduced long term repo operations (LTROs) through which it had conducted term repos of one-year and three-year tenors at policy repo rate in order to enable better transmission of its monetary policy.

The central bank explained that abundant liquidity conditions along with 3-year LTROs anchored the short-term G-sec yields closer to the policy repo rate.

“The 3-year G-sec yield too has dropped by 158 basis points while the 10-year yield has dropped by 74 bps between announcement of LTROs and July 10, 2020. The government securities market has remained resilient and the G-Sec yields have remained in tight range despite significant enlargement of government borrowing programme and increase in the borrowing limit of state governments,” the report said.