Meaning of Repo and Reverse Repo

Repo vs reverse repo

What is the meaning of the terms repo and reverse repo?

Repo is the facility extended by the Reserve Bank of India to the banking sector to borrow short-term from it on the strength of the gilts — government issued and guaranteed short-term papers such as treasury bills.

Any increase in the repo rate dampens the enthusiasm of banks to borrow thus and any decrease therein whets their appetite to borrow.

Repo is characterised by sale followed by purchase of the securities.

When securities are sold to the RBI, more money is released into the system. Precisely the opposite happens with reverse repo — the RBI sells securities to the banks and follows it up with purchase on maturity.

Repo and reverse repo thus help the RBI control money supply.

If it wants to squeeze it, it increases both the repo and reverse repo rates, and does the opposite if it wants to increase the money supply.