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Money | Treasury
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Money | Certificates
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Commercial Papers Market |
Ready Forward Contracts |
Commercial Bills | Terminology
7.
READY FORWARD CONTRACTS
It is
a transaction in which two parties agree to sell and
repurchase the same security. Under such an agreement
the seller sells specified securities with an agreement
to repurchase the same at a mutually decided future
date and a price. Similarly, the buyer purchases the
securities with an agreement to resell the same to the
seller on an agreed date in future at a predetermined
price. Such a transaction is called a Repo when viewed
from the prospective of the seller of securities (the
party acquiring fund) and Reverse Repo when described
from the point of view of the supplier of funds. Thus,
whether a given agreement is termed as Repo or a Reverse
Repo depends on which party initiated the transaction.
The lender
or buyer in a Repo is entitled to receive compensation
for use of funds provided to the counterparty. Effectively
the seller of the security borrows money for a period
of time (Repo period) at a particular rate of interest
mutually agreed with the buyer of the security who has
lent the funds to the seller. The rate of interest agreed
upon is called the Repo rate. The Repo rate is negotiated
by the counterparties independently of the coupon rate
or rates of the underlying securities and is influenced
by overall money market conditions.
The Repo/Reverse
Repo transaction can only be done at Mumbai between
parties approved by RBI and in securities as approved
by RBI (Treasury Bills, Central/State Govt securities).
Uses of
Repo
It helps banks to invest surplus cash
It helps investor achieve money market returns with
sovereign risk.
It helps 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.
RBI uses Repo and Reverse repo as instruments for liquidity
adjustment in the system.
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