If you’re looking for a synonym for “repurchase agreement,” then REPO might be the right choice. This short form is often used to describe a type of transaction between banks and the RBI, in which the banks agree to repurchase government securities in the same amount at a future date. There are many meanings of REPO, but the definition below will give you a quick guide. If you don’t want to read a whole book, don’t worry, the full meaning of this term is available online.
A repository is a central place for storing data and files. It is derived from the Latin word repositorium, which means a chamber or vessel. While the term “repo” has become synonymous with data storage, it does not necessarily mean that data can be stored there. Many types of repositories use the same underlying instrument. The name “repo” has been around for over 100 years. However, a recent debate over its future has raised concerns about the safety of the form and what it means for financial institutions.
What is a repo? It is a lending agreement between two parties. A commercial bank can borrow money from a central bank at a lower interest rate than it can lend against government securities. The exchange of money between banks is done to control inflation. If the Repo Rate goes up, the money supply in the economy is reduced. Conversely, a low repo rate may prevent inflation. Repo rates are vital in times of economic difficulty.
A repurchase agreement is an arrangement where one party pledges collateral and then pays the other party at a fixed price. This is a short-term investment, but is safer than other forms of investment. It provides collateral and offers high market liquidity. Many Money Funds buy repos, and traders in trading firms use them to finance their long positions. In many cases, this can result in a reverse repo and sale of securities, thereby lowering the costs associated with long positions.
The RBI regulates the money supply in India through this system. It repurchases securities from private banks at a discounted rate called the repo rate. This allows the government to control the amount of money that the economy can borrow. Reducing the repo rate encourages banks to resell their securities back to the government, which increases the money supply in the economy. Conversely, an increased repo rate discourages banks from doing so, which reduces the supply of money in the economy.
The simplest form of a repo is a sell/buyback, where the security buying party, B, acts as both a lender and a borrower. A sell/buyback, however, does not require any special legal documentation. However, unlike a refinancing transaction, a repo requires a master agreement between the seller and buyer, such as the SIFMA/ICMA commissioned Global Master Repo Agreement. Failure to execute a master agreement will result in less legal standing when attempting to recover the collateral.
