Repo and Reverse Repo

What is a repo transaction? Every MBA student knows the word ‘Repo’ – however if you drill down and ask for its full form or what it means…you are in trouble!

So here is what an MBA student (Finance major) can say when confronted with the question – What is a repo transaction?

RE PO stands for repurchase option or a repurchase agreement. It is a transaction in which one party sells securities to another with a condition that it will be bought back on a specified date at a particular price. It is typically like a secured transaction – however it is recorded as a buy and a sell – not like a borrowing transaction. The rate of interest that is built into the transaction is called the ‘Repo rate’. Since it is a collateralised borrowing (or lending) REPO RATE is normally less than the reverse repo rate. Repo auctions of RBI is meant to reduce excess liquidity in the system.

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