Repo
Also written Ready forward contract · Market repo
A ready forward contract: borrowing money by selling securities with an agreement to buy them back later at a higher price that includes the interest.
In plain language
A repo is a secured short-term loan dressed as two trades. The borrower sells securities to the lender today and agrees to repurchase the same securities on a fixed future date. The repurchase price is higher than the sale price; the difference is the interest.
That is why the workbook also calls it a ready forward contract. From the lender's side the same deal is a reverse repo, which the workbook describes as essentially collateralised lending of funds.
Every repo therefore has two legs. The time between them is the repo period or repo tenor.
Do not confuse a repo (the transaction) with the repo rate (the policy rate at which the central bank lends to banks). This page is about the transaction.
How it works
From Chapter 1, section 1.3 of the workbook:
- Interest is computed on the actual amount borrowed by the repo seller, which is the consideration amount in the first leg. The lender receives it in the second leg, when the borrower buys the security back at a higher consideration.
- Regulator: RBI regulates the repo market in India.
- Participants: scheduled commercial banks, primary dealers, mutual funds, NBFCs, financial institutions, insurance companies, corporates, provident/pension funds, payment banks, small finance banks and others.
- Eligible securities: Government Securities and corporate bonds.
- G-sec repo is traded/reported on the Clearcorp Repo Order Matching System (CROMS) of Clearcorp Dealing Systems and settled by CCIL along with G-secs.
Repo in corporate bonds was introduced by RBI in 2010. Eligible securities are:
- Listed corporate bonds and debentures (a participant cannot borrow against its own securities or those of related entities)
- CPs and CDs
- Units of Debt ETFs
- Municipal debt securities
- Any other security of a local authority specified by the Central Government
In Chapter 4 (section 4.1.5, upstreaming of client funds), repos reappear: brokers may pledge units of Mutual Fund Overnight Schemes created from client funds only if those schemes deploy money in overnight government bond repo markets and overnight TREPS.
The formula
Interest (Rs) = Second-leg consideration − First-leg consideration
A worked example
Figures are illustrative.
Bank A needs Rs 10 crore for 7 days. It holds Government Securities.
| Leg | What happens | Amount |
|---|---|---|
| First leg (today) | Bank A sells G-secs to Mutual Fund B | Receives Rs 10,00,00,000 |
| Second leg (day 7) | Bank A buys the same G-secs back | Pays Rs 10,01,20,000 |
Interest to Mutual Fund B = Rs 10,01,20,000 − Rs 10,00,00,000 = Rs 1,20,000, calculated on the first-leg consideration of Rs 10 crore.
For intuition only, on a simple 365-day basis that is 1,20,000 ÷ 10,00,00,000 × 365 ÷ 7 ≈ 6.26% a year.
For Bank A this is a repo (borrowing). For Mutual Fund B the same deal is a reverse repo (collateralised lending). Because the collateral is G-secs, the deal would be traded or reported on CROMS and settled by CCIL.
Why NISM asks about it
Chapter 1 (section 1.3, Money Market) defines market repo, reverse repo, repo tenor, the interest computation, CROMS/CCIL settlement, corporate bond repo and its eligible securities. Chapter 4 (section 4.1.5) uses overnight repo and TREPS as the only permitted deployment for Mutual Fund Overnight Schemes that hold upstreamed client money. Expect definition questions and "which of these is not eligible for corporate bond repo" style items.
Common exam traps
- Repo = borrower's view; reverse repo = lender's view of the same transaction.
- Interest is on the first-leg consideration, and is received in the second leg.
- Own or related-entity bonds cannot be used as collateral in corporate bond repo.
- G-sec repo settles through CCIL, traded/reported on CROMS. Do not say it settles through the stock exchange clearing corporation.
- Corporate bond repo dates from 2010, introduced by RBI, not SEBI.
- Repo is not the repo rate.
Where this is taught
- Series VII · Chapter 1: Introduction to Securities Marketintroduced here
- Series X-A · Chapter 9: Investing in Fixed Income Securitiesintroduced here
Related terms
- Repo rateThe rate at which the central bank lends money to banks for a very short term against approved securities — the main lever it pulls to make money cheaper or dearer.
- Reverse repoThe transaction where the central bank borrows money from banks against securities, paying interest on it — the mirror image of a repo, where the central bank instead lends.
- Call moneyUncollateralised overnight lending and borrowing of funds between scheduled commercial banks and primary dealers — the shortest segment of the Indian money market.
- Certificate of DepositA negotiable, unsecured money market instrument issued by a bank against funds deposited with it, sold at a discount and repaid at face value within one year.
- Commercial PaperA short-term, unsecured, discounted money market instrument through which eligible companies raise funds for 7 days to one year, issued in Rs 5 lakh multiples.
- Triparty repoA repo in which a third party, the Triparty Agent, handles collateral selection, payment and settlement, custody and management between borrower and lender.
- Open Market OperationsRBI's purchases and sales of government securities in the market to adjust rupee liquidity on a durable basis — selling to absorb excess liquidity, buying to release liquidity when conditions are tight.
- Government Securities LendingLending a specific government security for a fee against the collateral of other government securities for a fixed period, under RBI's GSL Directions, 2023 — both securities are returned at the end.
- Regular arbitrageBuying a bond in the underlying market and selling futures on the same bond when futures trade above their theoretical price — locking in a pay-off that is the same whether the bond price rises or falls.
- Reverse arbitrageSelling a bond, lending in repo and buying futures on the same bond when futures trade below theoretical value — a locked-in pay-off not open to all, as short selling G-Secs is restricted.
- Notice moneyUnsecured lending or borrowing between banks for a period beyond overnight and up to 14 days, dealt and reported on the RBI's NDS-CALL platform.