What is Reverse Repo?

Repo and Reverse Repo : Transactions in repo signifies lending on a collateralised
basis. The terms of contract are in terms of a ‘repo rate’ representing the money
market borrowing/lending rate. Repo also help equilibrating between demand and
supply of short-term funds. The repurchase agreement (repo) is a versatile and
perhaps the most popular money market instrument in the international market. In our
market, two types of repo are currently in operation, interbank repo and the RBI repo.
Interbank repo are permitted under regulated conditions. RBI repo are used for
absorption of liquidity. Now all government securities are eligible for repo. Banks and
primary dealers are allowed to undertake both repo and reverse repo transactions.
Repo among eligible participants are currently permitted only in Mumbai and the RBI
also conducts repo operations only in the city of Mumbai.
Non-bank participants are also allowed to lend money through reverse repo to other
eligible participants. Repo have been permitted in PSU bonds and private corporate
debt securities provided they are held in a dematerialised form in a depository and
the transactions are done on recognised stock exchanges. RBI has removed the
restriction of a minimum period of three days for interbank repo transactions. RBI has
been using repo instrument effectively for absorbing excess liquidity and for infusing
funds to ease liquidity. The repo rate set by RBI has also more recently become a
sort of signaling rate along with the bank rate.