Banks Repurchase Agreements

When public central banks buy securities from private banks, they do so at a reduced interest rate called the repo rate. Like policy rates, repo rates are set by central banks. The repo interest rate system allows governments to control the money supply within economies by increasing or reducing available resources. A cut in repo rates encourages banks to sell securities for cash to the government. This increases the money supply available to the general economy. Conversely, by raising repo rates, central banks can effectively reduce the money supply by preventing banks from reselling these securities. Banks and their lobbyists tend to say that the rules were a bigger cause of the problems than the policymakers who put the new rules in place after the 2007-9 global financial crisis. The intent of the rules was to ensure that banks have sufficient capital and liquidity that can be sold quickly in case of difficulties. These rules may have led banks to maintain reserves instead of lending them in the repo market in exchange for government bonds. From the buyer`s point of view, a reverse repo is simply the same pension activity, not that of the seller. Therefore, the seller who carries out the transaction would qualify it as a «repo», while in the same transaction, the buyer would qualify it as a «reverse repo». «Repo» and «Reverse Repo» are therefore exactly the same type of transaction that is only described from opposite angles. The term «reverse repo et sale» is generally used to describe the creation of a short position in a debt instrument in which the buyer immediately sells on the open market the assets provided by the seller.

On the date of execution of the repo, the buyer acquires the corresponding title on the open market and delivers it to the seller. In the case of a transaction of this type, the buyer expects the security in question to lose its value between the date of the repo and the date of settlement. In India, the Reserve Bank of India (RBI) uses Repo and Reverse Repo to increase or reduce the money supply in the economy. The interest rate at which the RBI lends to commercial banks is called the repo rate. In the event of inflation, the RBI can raise the repo rate, which discourages banks from borrowing and reducing the money supply in the economy. [17] From September 2020, the RBI repo rate will be set at 4.00% and the reverse repo rate at 3.35%. [18] Retirement transactions are generally considered safe investments, given that the security in question constitutes collateral, which is why most agreements concern US Treasury bonds. As a money market instrument, a repo transaction is actually a short-term, guaranteed, interest-rate loan. The buyer acts as a short-term lender, while the seller acts as a short-term borrower….