The transactions that are called as Repo Transactions is known as the most accepted ways to borrow/deploy short-term capital for the money market. Repo transactions contain securities repurchase dealings (repo) and security reverse repurchase deal (reverse repo).
When we talk of repo we generally refer to the process which indicates a transaction wherein two parties enter into an agreement, which may include RBI, a bank or primary dealers agree to sell and repurchase the same security.
Similarly the buyer also purchases the same securities with a predetermined agreement to again sell the securities at a rate that is predetermined. These types of transactions raise short-term finances for the party that is selling these securities. These transactions are called ‘Repo transaction’ while it is perceived from the point of the seller and similarly it turns into ‘Reverse repo’ when seen from the point of the buyer.
Repo transactions are comparable to a protected loan, along with the securities that the seller receives as collateral that can protect against any default. ‘Repo Rate’ is the interest rate that is agreed upon between the two parties and this rate is subjective to conditions prevailing in the money market. The generated yield in any repo transaction is inherent in the difference of price between selling and buying of the same securities.
The rate of interest agreed between the parties is called ‘Repo Rate’ and the rate is influenced by overall money market conditions. The yield on a repo transaction is implicit in the price difference between sale and repurchase of the transaction.
In the Indian financial market of reverse repo and repo transactions usually follow similar regulations. The minimum time period is of a day in the Indian financial market of repo/reverse repo transactions. While there are no statutory limits to the upper time period, it usually does not go beyond 3 months.
The main purpose of reverse repo is that it helps in adjusting short term loan surplus. The loans or securities that are taken for any kind of buying and selling are generally the government securities. The type of transaction and the amount of time taken greatly depends upon the regulations. The Indian money market repo or reverse repo transaction generally varies depending upon the regulations.
In the Indian money market repo or reverse repos are for a minimum period of one day. There is no mandatory limit for the maximum period for repo or reverse repo but people generally restrict it for not more than a period of three months at a stretch.
Usually the banks put into effect the repo transactions whenever they have a shortage of finances. They borrow a loan of funds from the RBI. A decrease in the rate in repo transactions help the banks in getting money at a much cheaper rate moreover whenever this rate escalate borrowing becomes costly from the RBI.
Generally the banks exercise these repo transactions when they have shortage of funds. They borrow funds from RBI. A reduction in the repo rate will help these banks to get the money at a cheaper rate and when this rate increases borrowing from the RBI becomes costly.
In case the RBI feels that the amount of money flowing in the bank is more then it will increase the repo rate i.e. the RBI will borrow money from the bank at a higher interest rate. So, the bank would prefer to keep their money with the RBI. When there is a hike in the repo rate it will in turn raise the cost of the funds at which the lenders give money and this would in turn tamper the demand for loans and the spending capacity of the consumer. One has seen the hikes in rates in recent times as a policy adopted by the RBI to control the rising inflation. In the recent months, the decrease in the gap between the reverse repo and repo rate is seen as measure to reduce volatility in the market.
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