Repurchase agreements are contracts between two banks or a bank and the central bank. Banks provide assets like Treasury Bills and Treasury Bonds in exchange for overnight loans from other banks or the central bank. Additionally, it is agreed that these securities will be repurchased at maturity for a fixed price. Banks receive the funds they require for various operations in this manner, and the central bank receives the security. This is usually a less than one-week short-term credit facility set up by selling securities to another market player with the promise to buy them back at a predetermined price on a fixed date. Only surplus securities that are above SLR can be used for a repo.
Basically, Repo is a repurchase agreement and refers to the rate at which commercial banks borrow money by selling their securities to the Central bank of our country i.e. in case of a shortage of funds or due to some statutory measures, Bangladesh bank have to maintain liquidity. It is one of the main tools of the Central Bank to keep inflation under control. Also known as a repo agreement, is a form of short-term borrowing, mainly in government securities.
The repo market is an important source of funds for large financial institutions in the non-depository banking sector, which has grown to rival the traditional depository banking sector in size. Large institutional investors such as money market mutual funds lend money to financial institutions such as investment banks, either in exchange for (or secured by) collateral, such as Treasury bonds and mortgage-backed securities held by the borrower financial institutions
Reverse Repo Rate is a mechanism to absorb the liquidity in the market, thus restricting the borrowing power of investors. 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.
An increase in the reverse repo rate will decrease the money supply and vice- versa, other things remaining constant. An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the BB, thereby decreasing the supply of money in the market. During high levels of inflation in the economy the Central bank increases the reverse repo. It encourages the banks to park more funds with the Central bank to earn higher returns on excess funds. Banks are left with lesser funds to extend loans and borrowings to consumers