Repo Rate and Reverse

Repo Rate
Repo Rate is at 8.25% Reverse Repo
Rate is at 7.25%

Introduction
Repo or repurchase agreement is a window which
enables a bank or a financial institution to borrow
money in the short-term. In the transaction, the
entity in question sells government securities or
bonds to the lender (another bank or institution),
with an agreement to buy the securities back after a
specified time and price
A repo instruments enable short-term borrowing
through sale operations in debt instruments. In a
developed financial market, Repos are recognized
as a very useful money market instrument.

Repo Instrument
The borrower parts with securities to the
lender with the agreement to purchase,
them at the end of the fixed period at a
specified price. The difference between
the purchase price and the original price is
the cost for the borrower. In India, Repos
are normally conducted for a period of 3
days.

Advantages of Repo

Repo entails instantaneous legal transfer of

ownership of the eligible securities. It helps to
promote greater integration between the
money and the Government securities markets.
Repo can be used to facilitate Governments
cash management. Repo is a very powerful and
flexible money market instrument for
modulating market liquidity.

Significance of Repo
Transactions
RBI conducts a repo, what it does in
effect is it lends to bank by
purchasing securities and selling
them bank at a predetermined price.
When RBI does a reverse repo, it
borrows from bank by selling them
securities and buying them back at a
future date. In December 92, the first
repos auctions took place. Presently,
the period of repos are maintained at

Repos Auctions
All transactions are effected at Mumbai and the
deals are put through the Subsidiary General
Ledger (SGL) account with the RBI. SGL form is the
form of transfer government securities from SGL
account of the bank to SGL account of another
bank maintained with public debt office RBI. Banks
can also enter into reverse repo transactions in Tbills and GoI dated securities to enable short-term
adjustment in liquidity in the system.

Reverse repo rate

Reverse repo rate is the rate of interest at which
the RBI borrows funds from other banks in the
short term. Like the repo, this is done by RBI
selling government bonds to banks with the
commitment to buy them back at a future
date.The banks use the reverse repo facility to
deposit their short-term excess funds with the RBI
and earn interest on it. RBI can reduce liquidity in
the banking system by increasing the rate at
which it borrows from banks. Hiking the repo and
reverse repo rate ends up reducing the liquidity
and pushes up interest rates.

The Market
In countries like the USA, Canada, Germany and
Australia repos are effectively used by central
banks as part of open market operations to
influence bank reserves/ overnight or short-term
interest rates and thereby the liquidity and
monetary conditions in the country. As of now, the
market has 15 GoI securities with repo facility, the
total value of which is around Rs. 60,000 crore .

Conclusion

The money market in India, which traditionally consisted

largely of call/ notice money market, now comprises
many other instruments such as CP, CDs and Repos. The
repo trade at this stage offers a quick medium for
developing a market for short-term funds especially as
the transactions are collateralized in the case of nonbanks, To enable orderly development of the money
market, prudential limits have been set on borrowing and
lending in the call money market for different categories
of participants based on different benchmarks.