27 June 2009
Repo rate means the rate at which the RBI is giving the loan to other banks and reverse repo rate means the rate at which other banks are giving loans to RBI.
27 June 2009
A repo or repurchase Agreement is an instrument of money market. Usually reserve bank (federal bank in U.S) and commercial banks involve in repo transactions but not restricted to these two. Individuals, banks, financial institutes can also participate in repurchase agreement.
Repo is a collateralized lending i.e. the banks which borrow money from Reserve Bank to meet short term needs have to sell securities, usually bonds to Reserve Bank with an agreement to repurchase the same at a predetermined rate and date. In this way for the lender of the cash (usually Reserve Bank) the securities sold by the borrower are the collateral against default risk and for the borrower of cash (usually commercial banks) cash received from the lender is the collateral.
Reserve bank charges some interest rate on the cash borrowed by banks. This rate is usually less than the interest rate on bonds as the borrowing is collateral. This interest rate is called ‘repo rate’. The lender of securities is said to be doing repo whereas the lender of cash is said to be doing ‘reverse repo’.
In a reverse repo Reserve Bank borrows money from banks by lending securities. The interest paid by Reserve Bank in this case is called reverse repo rate.
Borrower of funds is called as seller of repo and lender of funds is called as buyer of repo
29 June 2009
A Repurchase agreement (also known as a repo or Sale and Repurchase Agreement) allows a borrower to use a financial security as collateral for a cash loan at a fixed rate of interest.
In India, Repo rate is the interest rate at which the reserve bank of India lends money to other banks. Banks can borrow money from RBI in order to avoid scarcity of funds. Whenever the banks have any shortage of funds they borrow it from Reserve Bank of India (RBI).
Thus Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive. It is also a financial & economic tool in the hands of government to control the availability of money supply in the market by altering the repo rate from time to time.
Reverse repo rate (shortly known as rerepo rate) is just reverse; banks earn interest at reverse repo rate on excess funds parked with the reserve bank of India against Government securities. Also, the banks earn interest at reverse repo rate when they are depositing their money to RBI.
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