Repo & Reverse Repo: RBI's Liquidity Tools

What Exactly Is a Repo? The Basic Mechanics Explained

The word 'repo' is shorthand for 'repurchase agreement.' In a standard repo transaction, one party sells a security to another party and simultaneously agrees to buy it back at a predetermined price on a specified future date. The difference between the sale price and the repurchase price represents the interest cost, and the annualised form of that interest is the repo rate.

In India's central banking context, a repo transaction works as follows. A commercial bank - say it is facing a temporary shortage of funds to meet its reserve requirements or to fund lending - approaches the RBI through the Liquidity Adjustment Facility. The bank sells eligible government securities (G-Secs, Treasury Bills, State Development Loans, and certain other approved instruments) to the RBI and agrees to repurchase them the next business day. The RBI pays the bank the current market value of those securities, minus a haircut in some cases, and the bank pays back that amount plus the repo rate interest when it buys the securities back.

From the bank's perspective, this is effectively a secured overnight loan. The government security serves as collateral, which is why repo markets are considered low-risk. From the RBI's perspective, it is injecting liquidity into the banking system - creating new money that banks can use to lend to businesses and consumers.

The reverse repo works in the opposite direction. When banks have more cash than they need - perhaps because credit demand is low, or because large government spending has pushed excess money into the banking system - they can park this excess with the RBI. The bank lends money to the RBI, which sells government securities to the bank and agrees to repurchase them the next day. The bank earns the reverse repo rate on this transaction. This is RBI absorbing excess liquidity from the system.

It is important to note that from RBI's accounting perspective, the repo is a liability (it has borrowed money by agreeing to buy back securities) and the reverse repo is an asset (it has lent money). The terminology can sometimes cause confusion because the same transaction looks like a 'repo' from one side and a 'reverse repo' from the other side. The convention in India is always to describe the transaction from RBI's standpoint: repo means RBI is lending to banks, reverse repo means RBI is borrowing from banks.

Modern Indian repo transactions primarily happen overnight (one business day maturity), though the RBI also conducts term repos of 7, 14, or sometimes longer durations under various liquidity management operations. The overnight repo under the LAF is the most policy-relevant, as its rate is officially set by the Monetary Policy Committee and announced publicly every six weeks at scheduled policy meetings.

The Liquidity Adjustment Facility: India's Monetary Policy Corridor

Before 2000, India did not have a formal framework for daily liquidity management. The RBI introduced the Liquidity Adjustment Facility in June 2000, and it fundamentally changed how monetary policy is implemented in India. The LAF created what is known as an 'interest rate corridor' - a band bounded by the repo rate on the upper end and the reverse repo rate on the lower end, within which overnight interbank rates are expected to stay.

The logic of the corridor is elegant. Banks will never borrow in the interbank market at a rate higher than the repo rate, because they can always borrow from the RBI at that rate. Similarly, banks will never lend in the interbank market at a rate lower than the reverse repo rate, because they can always earn at least that by lending to RBI. This creates a floor and a ceiling for the overnight market, keeping rates orderly.

Over the years, the LAF framework has evolved considerably. A major restructuring happened in 2011 when the RBI introduced the Marginal Standing Facility (MSF). The MSF allows banks to borrow from RBI above and beyond their normal quota at a rate 100 basis points above the repo rate, acting as an emergency safety valve. This effectively created a three-tier structure: reverse repo at the bottom, repo in the middle, and MSF at the top.

In 2020, after the pandemic disrupted financial markets globally, the RBI introduced another important innovation. It began using the reverse repo rate not merely as a passive floor but as an active tool. When the system had excess liquidity - as it did through much of 2020 and 2021 because of RBI's large-scale bond purchases and the government's fiscal spending - the RBI widened the corridor asymmetrically. At one point, the reverse repo rate was kept at 3.35% while the repo rate was at 4%, a spread of 65 basis points rather than the customary 25. This signalled RBI's discomfort with excess liquidity without formally hiking the policy rate.

More recently, the RBI introduced the Standing Deposit Facility (SDF) in April 2022 as a new floor for the corridor. The SDF allows RBI to absorb excess liquidity from banks without providing any collateral in return - unlike the reverse repo where RBI sold government securities to banks. This gave RBI a more flexible absorption tool. The SDF rate was set at 25 basis points below the repo rate, and in practical terms, the SDF became the operative floor of the corridor, while the reverse repo (at 3.35% at the time) was placed below the SDF but retained for historical and signalling purposes.

For bond market investors, the corridor matters because it anchors the entire short end of the yield curve. Treasury Bill yields, overnight indexed swap rates, and call money rates all cluster within this corridor. Any shift in the corridor - whether by changing the repo rate, the MSF rate, or the SDF rate - immediately transmits to these short-term instruments and gradually ripples to longer maturities.

How the Repo Rate Influences the Entire Economy

When the RBI's Monetary Policy Committee votes to change the repo rate, the decision does not affect only the cost at which banks borrow from RBI. It sets off a transmission chain that eventually reaches every corner of the Indian economy - from a small business owner in Surat seeking a working capital loan to a homebuyer in Bengaluru calculating whether to fix or float their mortgage rate.

The first link in the transmission chain is the banking system. Commercial banks in India price their loans using either MCLR (Marginal Cost of Funds-based Lending Rate) or the External Benchmark Lending Rate (EBLR). Since October 2019, the RBI has mandated that all new floating-rate retail loans (home loans, auto loans, personal loans) and loans to small businesses must be linked to an external benchmark. Most banks have chosen the RBI repo rate as this benchmark. This means that when RBI cuts the repo rate by, say, 25 basis points, home loan borrowers on EBLR-linked loans see their EMIs recalculate relatively quickly - typically within one to three months, as per the reset clause in their loan agreement.

For depositors, the transmission works similarly but in reverse. When the repo rate rises, banks' funding costs increase, and they generally raise deposit rates to attract more funds from the public. When the repo rate falls, deposit rates tend to come down, though banks are often slower to cut deposit rates than to cut lending rates, for competitive reasons.

Beyond banking, the repo rate influences capital markets in multiple ways. For bond markets, the relationship is direct and inverse: when the repo rate rises, new bonds are issued at higher yields, making existing bonds with lower coupons less attractive, so their prices fall. For equity markets, the transmission is more complex. Lower interest rates reduce the discount rate used in company valuations (since future cash flows are worth more when discounted at a lower rate), which mechanically boosts stock valuations, all else being equal. Additionally, cheaper credit encourages corporate investment and consumer spending, supporting earnings growth.

The currency market is also influenced. Higher repo rates make Indian rupee assets more attractive to foreign investors seeking yield, tending to strengthen the INR. Conversely, rate cuts can reduce the interest rate differential with other countries, potentially leading to capital outflows and rupee depreciation. RBI must balance these considerations carefully, especially when the US Federal Reserve is moving rates in a different direction than India's domestic cycle requires.

Inflation, which is the primary mandate of the Monetary Policy Committee under the flexible inflation targeting framework (target: 4% CPI with a band of 2% to 6%), is the ultimate driver of repo rate decisions. When inflation rises above the tolerance band, the RBI typically hikes rates to cool demand. When growth falters and inflation is benign, RBI cuts rates to stimulate activity. This balancing act plays out every six weeks at MPC meetings.

Reverse Repo, SDF, and the Mechanics of Liquidity Absorption

While the repo rate gets most of the media attention, the reverse repo - and its modern counterpart, the Standing Deposit Facility - are equally critical tools, especially in periods of excess liquidity. Understanding how liquidity absorption works is essential for anyone trying to understand short-term interest rate movements and money market fund returns.

Excess liquidity in the banking system can arise from several sources. When the RBI buys bonds from banks under its Open Market Operations (OMO) programme, it pays banks in cash, adding liquidity. When the government spends money - paying salaries, making welfare transfers, funding infrastructure projects - that money ends up in bank accounts across India, increasing the reserves that banks hold with the RBI. Foreign exchange inflows, such as FDI receipts or foreign portfolio investment into Indian bonds, also add rupee liquidity when RBI intervenes to prevent excessive INR appreciation.

Excess liquidity creates a problem for monetary policy. If banks have more cash than they need, overnight interbank rates fall to the floor of the corridor - the reverse repo rate or SDF rate. The policy repo rate becomes less relevant for day-to-day market functioning when nobody needs to borrow at that rate. In extreme cases, excess liquidity can fuel credit booms and asset price bubbles, even without any formal rate cut.

The traditional reverse repo under the LAF was a collateralised instrument: RBI would sell government securities to banks and promise to buy them back the next day. The SDF, introduced in April 2022, removed this collateral requirement. Banks simply deposit cash with RBI and earn the SDF rate, with no securities exchanged. This is operationally simpler and also important because it does not tie up the government securities that RBI holds - allowing those securities to remain available for other operations.

In practice, both instruments are used simultaneously. Variable Rate Reverse Repo (VRRR) auctions - where RBI absorbs funds at rates determined by competitive bidding rather than a fixed policy rate - are conducted regularly to fine-tune liquidity. When RBI wants to absorb more liquidity quickly, it can conduct large VRRR auctions. When it wants to signal a tighter stance without formally hiking the policy rate, it can cut the amount it makes available through fixed-rate repos while increasing VRRR absorptions.

For retail investors, the practical implication of all this shows up in the returns of liquid funds, overnight funds, and ultra-short duration funds in the mutual fund universe. These funds primarily invest in money market instruments - call money, overnight repos, T-Bills, CPs, and CDs - whose yields are directly anchored to the LAF corridor. In periods of tight liquidity, these funds earn returns close to the repo rate. In periods of excess liquidity, returns tend to gravitationally pull towards the SDF rate or reverse repo rate. (Specific fund selection requires your own research and due diligence, as past returns do not guarantee future performance.)

Term Repos, Variable Rate Operations, and Fine-Tuning Liquidity

The overnight fixed-rate repo and reverse repo under the LAF are the headline policy tools, but the RBI uses a much broader toolkit to manage liquidity conditions on a day-to-day basis. Term repos and variable rate operations add nuance and flexibility to how the central bank steers short-term rates.

Term repos are repurchase agreements with maturities of more than one day - typically 7 days, 14 days, or sometimes up to 28 days. The RBI introduced term repos in 2013 following a recommendation by the Urjit Patel Committee on strengthening monetary policy transmission. The committee argued that relying too heavily on overnight repos created excessive volatility in short-term rates. By providing 14-day term repos as the primary liquidity injection tool and making overnight repos a marginal facility, the RBI would encourage banks to plan their liquidity needs better and reduce reliance on daily borrowing.

The Variable Rate Repo (VRR) and Variable Rate Reverse Repo (VRRR) are auctions where participants bid competitively. Unlike fixed-rate facilities where all participants transact at the policy rate, in variable rate auctions the RBI announces the amount it wants to inject or absorb, and banks bid rates. The cut-off rate emerges from the auction clearing process, providing the RBI with valuable market intelligence about where banks perceive true liquidity stress.

During the COVID-19 pandemic period (2020-2021), the RBI used its liquidity toolkit with unprecedented aggression. It cut the repo rate to a historic low of 4% and conducted massive term repo and longer-term repo operations (LTROs and TLTROs) to ensure credit flowed to productive sectors of the economy. The TLTRO - Targeted Long-Term Repo Operations - had a specific twist: the funds injected had to be deployed in bonds issued by specific sectors (NBFCs, microfinance institutions, healthcare, among others) rather than left idle as cash reserves.

For market participants, the weekly LAF data that the RBI publishes on its website (rbi.org.in) is closely tracked. A large net injection position (banks borrowing heavily from RBI under repos) signals a tight liquidity environment, typically keeping overnight rates near the repo rate ceiling. A large net absorption position (RBI absorbing funds via reverse repo/SDF) signals excess liquidity, with overnight rates gravitating towards the SDF floor. Analysts use the LAF balance as one input to forecast near-term short-term rate movements and to assess whether the effective monetary stance is tighter or looser than the policy rate headline suggests.

Repo Rate History in India: Key Inflection Points

Studying the history of the RBI repo rate gives a vivid picture of India's macroeconomic journey - the inflation crises, growth downturns, external shocks, and policy responses that have shaped the country's financial landscape over the past two decades.

The LAF was formally introduced in 2000, but the modern framework of repo as the single policy rate crystallised after the 2011 Subbarao-era reforms. Before that, India used a dual-rate system with both the Bank Rate (for longer-term refinance) and the repo rate (for overnight LAF operations) serving as signals. The simplification to a single policy repo rate made communication cleaner.

During the high-inflation years of 2010 to 2014, the RBI under Governor D. Subbarao conducted an extended hiking cycle to combat stubbornly elevated WPI and CPI inflation, which was running above 8% to 10% at various points. The repo rate climbed to 8.5% by late 2011 and stayed elevated for an extended period, contributing to a growth slowdown that led to criticism that the RBI had been too aggressive.

Governor Raghuram Rajan's tenure (2013-2016) saw the introduction of the flexible inflation targeting (FIT) framework, formalised through an amendment to the RBI Act in 2016. Under FIT, the Monetary Policy Committee - comprising three RBI members and three government nominees - was established, and a formal inflation target of 4% CPI (with a tolerance band of 2% to 6%) was legislated. This brought India in line with global best practices for central bank independence and inflation targeting.

The rate cut cycle from 2019 onwards brought the repo rate down from 6.5% to 4% by May 2020, with emergency cuts responding to the pandemic. The subsequent hiking cycle starting in May 2022 - partly in response to global inflation triggered by post-pandemic supply disruptions and the Russia-Ukraine conflict - brought the rate back up to 6.5% by February 2023, where it remained for an extended period before a cut cycle commenced again in 2025.

Each of these inflection points had profound consequences for bond investors. During rate hike cycles, holders of long-duration government bonds saw significant mark-to-market losses as prices fell with rising yields. During rate cut cycles, those who had locked into high-yield bonds reaped capital gains as prices rose. This is why duration management - understanding how the portfolio's sensitivity to rate changes needs to be managed - is so central to fixed income investing.

For equity investors, rate history reinforces the cyclical relationship: rate cuts from 2019 to 2020 contributed to market recoveries, while the aggressive hiking of 2022-2023 introduced headwinds for highly valued sectors. However, equity market outcomes are multi-factor, and the repo rate is only one among many influences including corporate earnings, global risk appetite, and domestic policy environment.

Repo Transactions in the G-Sec Market: Impact on Bond Prices and Yields

The government securities market in India - where Central Government bonds (G-Secs), Treasury Bills (T-Bills), and State Development Loans (SDLs) are traded - is perhaps the market most directly connected to repo rate dynamics. Every government bond is priced as a discounted value of its future cash flows, and the discount rate used is closely linked to market interest rates, which are in turn anchored by the repo rate.

When the RBI changes the repo rate, the immediate impact is on the short end of the yield curve - specifically T-Bills maturing in 91 days, 182 days, and 364 days. These instruments have maturities short enough that their yields are almost entirely driven by current and near-term expected policy rates. If the RBI cuts the repo rate by 25 basis points and the market expects further cuts, T-Bill yields fall sharply.

The transmission to longer-dated bonds - 5-year, 10-year, 20-year, and 30-year G-Secs - is more complex. Long bond yields reflect not just the current policy rate but the entire expected path of policy rates over the bond's lifetime, plus a term premium (additional compensation for the risk of holding a longer-duration instrument). If investors believe a repo rate cut is temporary and inflation will eventually force rates higher, long bond yields may not fall as much as short-term yields - or may not fall at all. This phenomenon, known as a 'bear flattening' or 'steepening' of the yield curve depending on direction, is closely watched by fixed income portfolio managers.

The benchmark 10-year G-Sec yield is the most widely quoted indicator of Indian long-term interest rates. Market participants watch it the way equity investors watch the Nifty 50 index - as a barometer of overall conditions. When RBI policy expectations shift, the 10-year yield moves accordingly, and this affects the valuation of every fixed income instrument, from corporate bonds to infrastructure debentures.

Repo transactions also directly support liquidity in the G-Sec market. Primary Dealers (PDs) - specialised institutions licensed by the RBI to support government bond auctions - use repos extensively to finance their bond inventory. If a PD wins a large allocation in a G-Sec auction, it may not have the full cash immediately. It will repo out those bonds to raise cash, support the settlement, and then either sell the bonds in the secondary market or hold them until it can unwind the repo. Without the repo market functioning smoothly, the primary auction market for government securities would be far less efficient.

For retail investors accessing G-Secs through the RBI Retail Direct platform, understanding the repo rate backdrop helps interpret whether a particular maturity offers fair value. An investor comparing a 10-year G-Sec yield against the current repo rate can assess whether the market is pricing in a significant change in future rates - informing a decision about whether to invest in short, medium, or long duration instruments. (This is not investment advice; please assess your own risk tolerance and financial goals.)

Repo Rate vs. Other Key RBI Policy Rates: Understanding the Full Framework

The repo rate does not operate in isolation. It sits within a constellation of policy rates and reserve requirements that together form India's monetary policy transmission system. Understanding how these different levers interact gives a fuller picture of how the RBI shapes financial conditions.

The Bank Rate, historically used before the LAF was established, is now aligned to the MSF rate (repo rate plus 100 basis points) and primarily applies to penalties for CRR and SLR shortfalls and for certain refinance facilities. It is no longer an independent policy tool.

The Cash Reserve Ratio (CRR) requires banks to hold a certain percentage of their Net Demand and Time Liabilities (NDTL) as cash deposits with the RBI - these deposits earn no interest. The CRR is a powerful quantity-based liquidity tool. When RBI raises the CRR, it effectively impounds cash from the banking system, reducing the money available for lending. A CRR reduction does the opposite - it releases cash into the system. During the pandemic, RBI cut the CRR from 4% to 3% to provide immediate liquidity relief. Unlike the repo rate, CRR changes tend to have a more blunt, immediate impact on the level of liquidity rather than its price.

The Statutory Liquidity Ratio (SLR) requires banks to maintain a certain percentage of NDTL in the form of approved securities - mainly G-Secs, T-Bills, and SDLs. The SLR creates a captive demand for government securities, which helps the government fund its fiscal deficit. It also provides banks with a liquid asset buffer. SLR securities can be used as collateral in repo transactions with RBI, creating a link between the SLR requirement and the repo mechanism.

The Open Market Operations (OMO) are outright purchases or sales of government securities by the RBI in the secondary market, not repo transactions (no repurchase agreement is involved). OMOs permanently change the level of reserves in the banking system. When RBI buys G-Secs from banks via OMO, it injects durable liquidity. When it sells, it drains permanent liquidity. OMOs were used extensively in recent years both to manage long-term liquidity and to influence the shape of the yield curve.

The Foreign Exchange Swap is another indirect tool. When RBI buys USD from banks (USD/INR buy-sell swap) to prevent excessive INR appreciation, it pays rupees to the banks, adding rupee liquidity. The reverse leg of the swap (the sell part) later drains that liquidity. By altering the tenor of these swaps, RBI can add short or long-term rupee liquidity without directly touching the repo rate.

For the sophisticated investor, monitoring all of these signals simultaneously - repo rate, SDF rate, LAF balance, CRR, OMOs, and FX interventions - provides a much more complete picture of the RBI's effective monetary stance than the headline policy rate alone. Analysts often talk about 'the stance' being separate from 'the rate': RBI can maintain an 'accommodative stance' (signalling rates will stay low or go lower) even while not cutting rates, and a 'withdrawal of accommodation' before actually hiking rates.

Global Repos and India's Context: How International Rates Interact

India's repo rate does not exist in a vacuum. The Reserve Bank of India must constantly calibrate its policy against global interest rate movements, particularly those of the US Federal Reserve, the European Central Bank, and increasingly the Bank of Japan. The cross-border transmission of monetary policy has become more pronounced as India's capital account has progressively opened.

The most important external influence on India's repo rate is the US Federal Funds Rate. When the US Fed aggressively raises rates - as it did in 2022-2023, taking the Fed Funds Rate from near-zero to above 5% - it creates multiple pressures on India. Foreign portfolio investors (FPIs), attracted by higher US yields, may sell Indian bonds and equities to invest in US treasuries, putting downward pressure on the INR and Indian bond prices. To maintain the interest rate differential needed to keep FPI flows stable and prevent excessive INR depreciation, the RBI may find itself hiking rates faster or higher than purely domestic inflation would justify.

Conversely, when global rates fall - as they did during the post-GFC (2008-2009) era and again post-pandemic - the RBI has more room to cut rates without triggering capital outflows, since the carry trade advantage (investing in higher-yielding Indian assets) remains attractive even at lower absolute rates.

India's sovereign bond inclusion in global indices (JP Morgan's Government Bond Index-Emerging Markets, Bloomberg EM Local Currency Government Index) has increased the relevance of global rate movements. As more foreign capital flows into Indian G-Secs, the yield on Indian government bonds becomes more sensitive to global risk sentiment, US Treasury yield movements, and global dollar liquidity conditions - all of which interact with the domestic repo rate framework.

For retail investors, this global-domestic interaction means that a repo rate cut in India may not always produce the expected decline in long-term G-Sec yields if global factors are simultaneously pushing yields higher. It also means that understanding RBI monetary policy requires at least some awareness of global monetary cycles - something that was less important for a predominantly closed economy but is increasingly relevant for India's integrated financial markets.

Practical Implications for Retail Investors and Borrowers

Having understood the mechanics, history, and broader framework of repo and reverse repo, let us bring it back to what matters most for a retail investor or borrower navigating India's financial system in practice.

For borrowers, the key development has been the shift to EBLR-linked loans. If your home loan is linked to the repo rate (which is the external benchmark most banks use), your interest rate resets periodically - typically every three months - based on any change in the repo rate. A 25-basis-point repo rate cut will, within one to three months, directly reduce your home loan interest rate by 25 basis points. This is a significant improvement in transmission compared to the old BPLR (Benchmark Prime Lending Rate) or MCLR system, where banks had discretion to delay passing on rate cuts. Borrowers should check their loan documents to understand whether their loan is EBLR-linked, MCLR-linked, or fixed-rate, as the transmission differs for each.

For fixed deposit investors, repo rate direction is a crucial planning input. When a rate hike cycle is underway, locking in long-term FDs at current elevated rates can be rewarding. When rate cuts are anticipated, short-term FDs or floating-rate options may serve better, as they allow you to roll over at potentially higher rates if the cuts do not materialise, or simply avoid locking in at low rates that persist for long. Always assess FD options across different tenors and issuers, bearing in mind that deposits above the DICGC insurance limit carry credit risk.

For bond investors - whether through direct G-Sec investment via RBI Retail Direct or through fixed income funds - the most important lesson from the repo rate framework is duration management. In a rising rate environment, shorter-duration bonds (T-Bills, short-duration funds) protect capital better because their prices are less sensitive to rate movements. In a falling rate environment, longer-duration bonds offer more capital appreciation potential as price sensitivity is higher. Understanding 'duration' as a measure of interest rate sensitivity is essential; the concept is covered in depth in the Duration and Convexity article on this platform.

For equity investors, tracking repo rate decisions provides one important macroeconomic input - but not a trading signal. Rate cuts generally create a supportive backdrop for equities, particularly for rate-sensitive sectors like housing, automobiles, and banking. Rate hikes can create headwinds for high-valuation sectors and compress margins for businesses with floating-rate debt. However, equity returns depend on many factors beyond the repo rate, and investors should avoid making portfolio decisions based solely on rate direction. Past rate cut or hike cycles have not always produced the expected equity market outcomes, because other factors (global sentiment, earnings growth, valuations) simultaneously influence prices.

Finally, for anyone managing personal finances, the repo rate serves as a useful reference point for assessing the fairness of financial products. If a financial institution is offering a loan at a rate that appears significantly above what the current repo rate plus a reasonable spread would imply, it is worth questioning whether you are being charged an appropriate rate. Similarly, if a deposit product is offering returns far below the repo rate without a corresponding reduction in risk or lock-in flexibility, it may warrant comparison with alternative options.

Example

Key benefits

How it works

1. 1
   MPC Sets the Policy Repo Rate

   The Monetary Policy Committee meets every six weeks and votes on the target repo rate based on its assessment of inflation, growth, and external conditions; the decision is announced publicly.

2. 2
   RBI Announces LAF Auction

   Each business day, the RBI announces the amount it is willing to inject or absorb through its Liquidity Adjustment Facility, inviting eligible banks and primary dealers to participate.

3. 3
   Banks Submit Bids

   Eligible participants submit bids electronically through the RBI's Negotiated Dealing System (NDS), specifying the amount they wish to borrow (under repo) or lend (under reverse repo/SDF) at the prevailing rates.

4. 4
   RBI Allots Funds and Securities Are Exchanged

   Under a repo, RBI transfers cash to banks and takes custody of the pledged government securities; under the SDF, banks transfer cash to RBI electronically with no securities movement.

5. 5
   Overnight Settlement

   All overnight LAF transactions settle on the same day through the RTGS (Real-Time Gross Settlement) system, with both parties honouring their obligations before the close of the settlement window.

6. 6
   Repurchase the Next Business Day

   Under a repo, the bank repurchases its securities from RBI the next business day by paying back the principal plus one day's repo interest, completing the transaction cycle.

7. 7
   RBI Monitors System Liquidity Daily

   RBI analyses aggregate LAF data - whether the system is in net injection or net absorption mode - and adjusts the size and tenor of subsequent operations to keep overnight market rates near the policy rate target.

Formula

Repo Interest (1 day) = Principal Amount × (Repo Rate ÷ 365)
Effective Cost or Return = (Interest Earned or Paid ÷ Principal) × (365 ÷ Days) × 100

Key takeaways

Frequently asked questions

Related terms