Here are the key points to remember in this chapter

» A repo is a transaction in which two parties agree to sell and repurchase the same security.

» There are two legs in a repo transaction namely:

1. The initial sale of securities and borrowing of funds, and

2. The repurchase of same securities and the returning of the funds borrowed.

» At times a repo is also called a ready forward transaction since it is a means of financing under which security is sold on a spot (ready) basis and is repurchased on a forward basis.

» An active repo market improves the liquidity and depth of the money market due to the increase in turnover.

» Repo helps the borrower to raise funds at better rates.

» An SLR surplus and CRR deficit bank can use the repo deals as a convenient way of adjusting SLR/CRR positions simultaneously.

» Apart from inter-bank repos, RBI has been using this instrument effectively for its liquidity management, both for absorbing liquidity and also for injecting funds into the system.

» Only eligible parties can transact in eligible securities. Eligible parties include Banks, Primary Dealers, Mutual Funds, Insurance companies, Non-Banking Finance Companies and Housing Finance Companies.

» RBI has prescribed that following factors have to be considered while performing repo:

1. Purchase and sale price should be in alignment with the ongoing market rates.

2. No sale of securities should be affected unless the securities are actually held by the seller in his own investment portfolio.

3. Immediately on sale, the corresponding amount should be reduced from the investment account of the seller.

4. The securities under repo should be marked to market on the balance sheet date.

» The RBI's decision to phase out non-banking entities from call money market has led to the development of a new product called "collateralized Borrowing and Lending Obligation" (CBLO).

» CBLO is a negotiable instrument, which is fully collaterized with no credit risk associated with it.

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