|
Features |
Repo
(Repurchase Agreement) |
Reverse
Repo (Reverse Repurchase Agreement) |
|
Definition |
Repo is
a purchase agreement and refers to the rate at which commercial banks borrow
money by selling their securities to the central bank of our country |
Reverse
repo rate is when the Central Bank borrows money from banks when there is excess
liquidity in the market. The banks benefit out of it by receiving interest
for their holdings with the central bank |
|
Purpose |
Used by
borrower to raise short-term capital by selling securities with a promise to
repurchase them |
Used by
lenders to invest surplus funds for a short duration by purchasing securities
with a promise to sell them back. |
|
Primary
users |
Typically
used by financial institutions, dealers and central banks to manage liquidity |
Typically
used by financial institutions dealers and central bank to manages excess
liquidity |
|
Impact
on Money Supply |
Repos
decrease the money supply in the market as funds are borrowed and
collateralized securities are sold |
Reverse
repos increase money supply in the market as funds are lent out and
collateralized securities are purchased |
|
Collateral |
Securities
(e.g. government bonds) are used as collateral, temporarily transferring
ownership to the buyer |
Securities
(e.g. government bonds) are used as collateral, temporarily transferring
ownership to the buyer |
|
Regulation
and usage by |
Central
banks use repo as a tool to inject liquidity into the banking system. For
example, the Federal reserve conducts |
Central
banks use reverse repos as a tool to absorb excess liquidity from the banking
system. For example, the Federal reserve |