Liquidity Infusion Facility Current Affairs - 2020

RBI to buy and sell Government Securities worth Rs 10,000 crores

On December 23, 2019, the Reserve Bank of India will buy and sell government securities of Rs 10,000 crores under a special Open Market Operation. Such moves are implemented by the federal bank in order to bring down the interest rates of long-term securities. This time RBI has named its move as “Operation Twist”.

There are different types of Government Securities issued by the Federal Bank.

Operation Twist

The buying of long-term bonds and selling of short-term bonds by RBI is called operation twist. When the long-term bonds are bought by RBI, their demand increases. This lowers long term yields. This way the yield curve gets twisted and hence the name “Operation Twist”. This has significant effect on the long term interest rated that govern the investment and growth in the economy.

Operation Twist is generally used by Central Banks when long term interest rates remain high in spite of lowering interest rates.

United States implemented the operation twice, in 1961 and 2011.

What is Open Market Operation?

It is a tool used by the RBI to smoothen liquidity conditions in the country. The main objective of OPO is to regulate money flow in the country. RBI operates the OMO through commercial banks and does not deal with the public directly.

Key Features of Government Securities

The Government Securities can be issued only by Governments at the Centre and State and also by Semi-Governmental authorities. The semi-Governmental Authorities are those authorized by the GoI.

When the RBI wants to increase money supply in the economy, it purchases government securities. It sells government securities when the need to suck out liquidity occurs.

Legislation of Government Securities

A Legal framework for issuance of government securities was provided by the Public Debt Act, 1944. It was replaced by the Government Securities Act, 2006. It oversees government securities and defines purpose of securities which is predominantly raising loans.

NHB to provide Rs.10,000 cr  liquidity infusion facility to HFCs

The housing sector regulator National Housing Bank (NHB) opened a liquidity infusion facility of Rs.10000 crore for Housing Finance Companies (HFCs) to improve liquidity in sector. The move is taken to unveil measures to boost lending and accelerate growth.

About Liquidity Infusion Facility

This decision by NHB to infuse an additional Rs.10000 crore into Housing Finance Companies (HFCs) would enable companies to provide individual loans for affordable housing. This new facility is over and above two existing refinance schemes of NHB.

Reason: This liquidity infusion move comes before the meeting of Union Finance Minister Nirmala Sitharaman with heads of all public sector banks to review issues linked to credit growth against the backdrop of a slowdown in several sectors. These various key sectors of economy include medium and small industries (MSME), retail, automobiles, affordable housing, non-banking finance companies (NBFC), housing finance companies (HFCs) to boost growth.

Importance: This is an important measure to ease fund flow to housing sector and would serve as additional liquidity for individual housing loans in affordable segment.

National Housing Bank (NHB)

It was established in 1988, under National Housing Bank Act, 1987. It is an All India Financial Institution (AIFI).

Function: It is an apex agency that operates as a principal agency to promote housing finance institutions both at local as well as regional levels. It also provides financial and other support incidental to such institutions and for matters connected therewith.