What is the meaning of repo rate by RBI of India

Answer Posted / shinoj.k.s.

A Repurchase agreement (also known as a repo or Sale and

Repurchase Agreement) allows a borrower to use a financial

security as collateral for a cash loan at a fixed rate of

interest. In a repo, the borrower agrees to sell

immediately a security to a lender and also agrees to buy

the same security from the lender at a fixed price at some

later date. A repo is equivalent to a cash transaction

combined with a forward contract. The cash transaction

results in transfer of money to the borrower in exchange

for legal transfer of the security to the lender, while the

forward contract ensures repayment of the loan to the

lender and return of the collateral of the borrower. The

difference between the forward price and the spot price is

the interest on the loan while the settlement date of the

forward contract is the maturity date of the loan.

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