The Reserve Bank of India (RBI) said it had deployed several conventional and unconventional tools to restore orderly conditions in financial markets and maintain normal functioning of financial intermediaries when COVID-19 sent financial markets in India and the world into a tailspin.

As a result, markets remained resilient, liquid and stable, establishing conditions for a finance-led recovery of the economy ahead of the revival of demand, it said in its monthly bulletin.

It said that with the onset of COVID-19, financial institutions were faced with liquidity stress, loss of access to funding and tightening of financial conditions amid disruption of cash flows and working capital cycles.

The central bank pointed out that the abundant, surplus liquidity in the system ensured short-term rates remained anchored and soft, relative to the policy repo rate, aiding monetary policy transmission with positive spillovers to other segments of the market spectrum.

Despite the increase in government borrowings and the significant loss of revenue due to the lockdown, the government securities (G-secs) market remained resilient and stable owing to targeted interventions by the RBI comprising Long Term Repo Operations (LTROs), outright Open Market Operations (OMO) purchases and Operation Twists, the article said.

It said a combination of aggressive policy easing, and the liquidity measures caused yields on G-Secs to drop to their lowest level in more than a decade. However, long-term rates have not fallen commensurately with short-term rates, steepening the G-Sec yield curve.

Access to finance

Targeted liquidity provision through LTROs and Targeted Long Term Repo Operations (TLTROs) brought down financing costs in the corporate bond market to decadal lows, eased the access of non-AAA rated entities and led to record primary issuances.

These measures also rekindled the risk appetite, as evinced in the compression of spreads of corporate bond yields over similar tenor G-Secs from the elevated levels witnessed in the last week of March 2020.

Additionally, TLTROs, complemented and backstopped by the special refinance facilities provided to All India Finance Institutions (AIFIs), helped channelise liquidity to small and mid-sized corporates, including non-banking financial companies (NBFCs) and micro finance institutions (MFIs), according to the central bank.

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