The term repurchase agreement (REPO) and reverse REPO refer to a type of transaction in which money market participant raises funds by selling securities and agreeing simultaneously to repurchase the same after a specified time generally at a specified price which typically include interest at agreed rate of interest.
Such a transaction is called REPO when viewed from the perspective of seller of securities(the party acquiring funds)and reverse REPO, when described from the perspective of supplier of funds.Thus whether a given agreement is termed Repo or reverse repo depends largely on which party initiated transaction.
Repos are usually arranged with a short term maturity.Sometimes it is overnight finance also. Repo are usually issued from 3 day to 14 days due to certain legal formalities.
In India the REPO market in govt securities and PSU bonds became very active in 1980s.Deals were generally inter bank.Certain regulatory restrictions were put in place in 1987.RBI imposed a ban in Inter Bank REPO in 1992 in all instruments except treasury Bill. Again RBI permitted interbank REPOS in certain central and govt stocks AND TREASURY BILLS of all maturities.
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