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Repo and Reverse Repo

>> November 10, 2011

Meaning of Repo 

Repo means repurchase agreement. When RBI repurchases his issued govt. securities, it is called Repo transaction. With Repo transaction, RBI increases the liquidity in the market. Bank gets money for selling Govt. securities to RBI. These money can be used for loan issues to public. So, this way, liquidity will increase in the market. Always, Repo transaction is carried at repo rate which is changed by RBI from time to time. This repo rate is just like interest rate.  Increase in repo rate, signals that deposit and advance rates of banks are likely to increase. Decrease in repo rate, indicates that deposit and advance rates of banks are likely to decline.

Meaning of Reverse Repo

Reverse Repo means reverse repurchase agreement. Actually, central bank RBI has power to issue the Govt. securities. But these securities are exchanged between bank and RBI from time to time. When RBI sells govt. securities to banks, it is called a reverse repo transaction. RBI will take decision to sell Govt. securities when RBI wants to absorb or decrease the liquidity in the market.

As per Wikipedia 

"A reverse repo is simply the same repurchase agreement from the buyer's viewpoint, not the seller's. Hence, the seller executing the transaction would describe it as a "repo", while the buyer in the same transaction would describe it a "reverse repo". So "repo" and "reverse repo" are exactly the same kind of transaction, just described from opposite viewpoints."

Repo and Reverse Repo Use in USA

Like RBI in India, United States Federal Reserve uses of repos and reverse repo technique for increase or decrease the liquidity in USA market. Under a repurchase agreement ("RP" or "repo"), the Federal Reserve (Fed) buys U.S. Treasury securities, U.S. agency securities, or mortgage-backed securities from a primary dealer who agrees to buy them back, typically within one to seven days; a reverse repo is the opposite. Thus the Fed describes these transactions from the counterparty's viewpoint rather than from their own viewpoint.

Related : Effect of Reverse Repo Rate

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