Ask NiyaRepurchase transactions, commonly known as Repo or Reverse Repo, are short-term borrowing arrangements in which two parties agree to sell and later repurchase the same security.
They are primarily used for overnight borrowing and are restricted to parties and securities approved by the Reserve Bank of India (RBI).
Eligible securities include: Government of India (GOI) securities, State Government securities, Treasury Bills (T-Bills), PSU Bonds, Financial Institution (FI) Bonds, and Corporate Bonds.
Under a Repo agreement, the seller agrees to sell specified securities with a commitment to repurchase them at a predetermined date and price.
From the perspective of the buyer, it is a Reverse Repo — the buyer agrees to sell the securities back to the seller on an agreed date at a set price.
The terminology used (Repo or Reverse Repo) depends on the perspective of the transacting party: the one selling the security sees it as a Repo; the buyer sees it as a Reverse Repo.
The Repo rate is the rate of interest agreed upon for the duration of the Repo period and represents the compensation paid by the borrower (seller) to the lender (buyer).
The RBI actively uses the Repo and Reverse Repo mechanisms to manage liquidity in the economy.
When liquidity is to be absorbed from the market, RBI enters into Repo transactions; when liquidity needs to be injected, it uses Reverse Repo.
The Repo rate functions as a floor rate in the money market, while the bank rate or refinance rate often serves as a ceiling, forming an interest rate corridor for market operations.
As of now, the Repo rate is 5.50% and the Reverse Repo rate is 3.35%.(As on 06 Jun 2025)
Banker’s Acceptance is a short-term credit investment created by a non-financial firm and guaranteed by a bank to ensure payment.
It takes the form of a bill of exchange drawn by a person and accepted by a bank, essentially serving as a buyer’s commitment to pay a specified amount on a specified date.
This payment promise is guaranteed by the buyer’s banker in return for a claim on goods used as collateral.
The instrument is tradable in the secondary market only if the drawer has a good credit rating.
Corporations typically use it as a negotiable time draft to finance imports, exports, and other goods-related transactions, especially where the creditworthiness of the trading partner is uncertain.
The most common maturity term for a Banker’s Acceptance is 90 days, although it may vary between 30 to 180 days.
The seller need not hold the instrument until maturity and may sell it in the secondary market at a discount from its face value to liquidate receivables.
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