Article

Repo
September 10 , 2012

Repurchase agreement or simply repo as we call it, is a money market instrument. The borrower when in need of short term funds must sell some security, usually bonds, to the lender with an agreement to repurchase them at a specific rate and date. Repurchase price is higher than the selling price and this difference effectively represents interest rate.

Repo is commonly used by RBI and the banks to make up for short term funds requirement. Repo rate is thus the rate at which RBI lends to banks for short term. Repo along with reverse repo, bank rate and MSF rate are policy rates wielded by RBI to manage general interest rate levels of deposits and loans of banks. A higher repo rate makes borrowing expensive for banks.

Bank rate represents long term lending rate of RBI to banks whereas Marginal Standing Facility (MSF) rate is the one on overnight borrowing of scheduled commercial banks from RBI.

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