Repo Transaction

Economy

Quick Definition

A Repo Transaction is a short-term borrowing arrangement where one party sells securities (usually government bonds) and agrees to repurchase them later at a predetermined price.

Detailed Explanation

In a repo transaction, banks or financial institutions raise short-term funds by selling securities and committing to buy them back later.

This is a key tool used by the Reserve Bank of India to manage liquidity and control interest rates in the economy.

  • The difference between the selling and repurchase price reflects the repo interest rate
  • Typically used for overnight or short-term funding

How Repo Works

  1. Bank sells government securities to RBI
  2. Receives funds (liquidity)
  3. Agrees to repurchase securities later
  4. Pays interest (repo rate)

Why Repo Transaction Matters

  • Provides liquidity to banks
  • Helps control money supply
  • Influences loan interest rates

Repo vs Reverse Repo

  • Repo: RBI lends money to banks
  • Reverse Repo: RBI borrows money from banks

Example

"A bank sells ₹100 crore worth of government bonds to RBI and agrees to repurchase them after 7 days at ₹101 crore—the extra ₹1 crore is interest."

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