Reserve Bank of India formulates and administers monetary policies specifically for the purpose of controlling the supply of money in the economy to stimulate various aspects of economic growth. The primary objective of such monetary policies is promoting economic development through price stability, regulation of the volume of bank credits, improving the efficiency of the financial system, promoting investments, and increasing diversification in financial markets. In this context, repo rate and reverse repo rate are instruments of RBI’s monetary policy that can help control the money supply in the economy.
Essentially, repos and reverse repos are two sides of the same coin—or rather, transaction—reflecting the role of each party. A repo is an agreement between parties where the buyer agrees to temporarily purchase a basket or group of securities for a specified period. The buyer agrees to sell those same assets back to the original owner at a slightly higher price using a reverse repo agreement.
Repros and reverse repros represent the same transaction but are titled differently depending on which side of the transaction you’re on. For the party originally selling the security (and agreeing to repurchase it in the future), it is a repurchase agreement (RP). For the party originally buying the security (and agreeing to sell in the future) it is a reverse repurchase agreement (RRP) or reverses repo.
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