Repo Repurchase Agreement

A repurchase agreement, commonly known as a repo, is a short-term financial arrangement where one party sells securities to another with an agreement to repurchase them at a predetermined price and date. The difference between the sale and repurchase prices represents the repo rate, which effectively serves as the interest rate on the short-term loan. Repos are widely used by banks, financial institutions, and central banks to manage liquidity and regulate the money supply in the economy. The securities involved act as collateral, reducing the risk of default. Example: A bank sells government bonds worth ₹10 crore to the Reserve Bank of India (RBI) and agrees to buy them back after 7 days for ₹10.02 crore. The ₹0.02 crore difference represents the interest (repo rate) earned by the RBI for the short-term lending.