What is Repo Rate?
The repo rate is the difference between the repurchase and sale prices associated with a given repossession transaction. Generally, the initial sale price is lower than the repurchase price that must be paid in order to regain possession of the item that was traded. This difference between the two prices normally functions as the amount of interest earned by the lender as part of the transaction process. Depending on the relationship between the lender and the debtor, the lender may choose to apply a discount rate to the percentage that serves as the interest on the loan. Perhaps the easiest way to understand the process of a repo rate is to consider an example of how this type of transaction works. Debtor A wishes to receive a loan from Lender B, but the lender requires some type of collateral to cover the amount of the loan. Thus, Debtor A provides the lender with a collection of jewelry that is currently valued at approximately the amount of the loan. Lender B accepts the jewels as
Repo rate is something like a discount rate at which a reserve bank repurchases government securities from the commercial banks. Now depending on the fiscal data and comfort level of the Government and level of money supply it decides to maintain in the country’s monetary system. To temporarily expand the money supply, the central bank decreases repo rates (so that banks can swap their holdings of government securities for cash), to contract the money supply it increases the repo rates.
