What is the repo full form? A repository is a central location where data is stored. The term comes from the Latin repositorium, meaning “a vessel or chamber.”
Repos are used to raise short-term funds from banks and other financial institutions. They involve a borrower selling securities to a dealer and then buying them back at a later date, usually for a higher price. Repos are often used to raise capital from investors for short-term purposes and are considered a secure way to access short-term capital for banks. They are generally for a period of a day or a week, but can range from one day to a fortnight.
Repo rates are used to influence the Indian economy. The RBI sets the Repo Rate, which is the interest rate at which it lends money to commercial banks against government securities. Changing the Repo Rate can slow the economy when the economy is booming, but can also slow it down when the economy is struggling. For this reason, the RBI is constantly watching the Repo Rate. The RBI slashes the rate to make money available in the economy when the economy is doing well and limits growth when the economy is slowing.
Refco’s collapse in 2005 brought particular forms of repo transactions into the spotlight. The fact that parties in a repo contract may not hold a specific bond at the end of the contract is a key point to understand. In a repo contract, the parties do not hold a bond at the end of the contract, which is why failures of the same underlying instrument are so common in the financial industry.
The main difference between a sell/buyback and a repo is that a sell/buyback is a pair of transactions that transfer possession and ownership to B, while the seller retains the ownership. A repos has a set end date, but this is not always the case. While a sell-and-buyback transaction does not require any special legal documentation, a repo does. It also is not treated as a loan for tax purposes, so it can reduce a buyer’s ability to retrieve their collateral in the event of bankruptcy.
A repo is an agreement wherein a seller purchases a security from a buyer at the end of the loan term. It is a repurchase agreement, and is considered a secured loan. While the buyer is the borrower, the seller is the lender. Repo is similar to a secured loan. The buyer receives securities as collateral from the seller, which protects him or her from default. If a seller does not repay the loan, it is a repose.
