Answer Posted / dayasagar s
A repo agreement is the sale of a security with a commitment to
repurchase the same security as a specified price and on specified
date while a reverse repo is purchase of security with a commitment
to sell at predetermined price and date. A repo transaction
for party would mean reverse repo for the second party. In liew
of the loan, the borrower pays a contracted rate to the lender,
which is called the repo rate. As against the call money market
where the lending is totally unsecured, the lending in the repo is
backed by a simultaneous transfer of securities. The main
players in this market are all institutional players like banks,
primary dealers like PNB Gilts Limited, financial institutions,
mutual funds, insurance companies etc. allowed to operate a
SGL with the Reserve Bank of India.
Further RBI also operates daily repo/ reverse repo auctions to
provide a benchmark rates in the markets as well as managing in
the liquidity in the system. RBI sucks or injects liquidity in the
banking system by daily repo/ reverse operations.
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