Section 1. Before we talk about Repo rate, lets understand Repo
Repo, also known as Repurchase agreement a transaction whereby one party sells securities to another party and agrees to repurchase the securities at a future date at a fixed price.
In Repo transactions
- One party can invest cash and earn interest on that cash. This investment in collateralized by the securities that are held as collateral.
- The counterparty can borrow the same asset and used it to cover a short position
Section 2. So, what is repo rate
The difference between this repurchase price and the original sale price effectively represents the interest rate for that repo, also called the repo rate
Section 3. Duration of Repo
Most of the repos are overnight. If the term is longer than overnight then its called term repo.