The term REPO refers to a central storage location for data and files. The term is derived from the Latin word repositorium, which means chamber or vessel. These facilities are often used for the storage of large amounts of data and files. Currently, repositorium borrowings totaled $4 trillion during the second quarter of 2018.
The Repo Rate is the single most important rate for the common man. It determines everything from interest rates on loans to returns on deposits. In times of financial crisis, people often borrow from their banks and pay interest. Commercial banks also borrow from a nation’s apex bank to fund operations. Commercial banks borrow from the Central Bank of any country at interest rates on the principal amount of loans. If a commercial bank needs to borrow money to meet an immediate demand, the bank can use the Repo Rate as a benchmark.
A repurchase agreement is a transaction in which one party sells securities at a set price and the other party buys those securities back at a specified price. It is a short-term loan and is intended to help market participants obtain a source of capital in an economically difficult time. The duration of the transaction is usually one day or less, but can range from a week to a fortnight. It is not unusual for the Central Bank to pay interest on these short-term loans.
The RBI regulates the Repo Rate by lending money to commercial banks and financial institutions in India in return for government securities. The rate affects the flow of money in the economy and slows down the economy when rates are high. In times of financial difficulty, the RBI cuts the Repo Rate. In these times, the RBI restricts the circulation of cash. Repo Rates help to stabilize the economy. This rate is used to combat inflation and limit its impact on the economy.
In addition to being a short-term borrowing instrument, the repo rate can help banks to finance their operations. The RBI sets the repo rate, and banks borrow from it at this rate to finance their needs. The repurchase agreement is a common tool in open market operations of the central bank. It is also one of the most effective ways of raising short-term capital for government securities dealers. Its use has extended its reach to the international economy, which is why repurchase agreements have become such an important part of the monetary system.
