What are Repurchase Options?

Repurchase Options (Repo): Repurchase options are the transactions where the
borrowing bank places certain acceptable security with the lender bank, against
funds to be borrowed. Both the banks agree to reverse the transaction on a predetermined
future date of agreed interest cost. These transactions are short tenure
and provide flexibility to suit both the lender and borrower. There is no fixed period
prescribed for such transactions. However, generally, repo transactions are for
minimum period of 3 days to 14 days. The interest rate is market determined. These
transactions are allowed only through SGL Account with RBI in Mumbai. This is a
popular mode of raising or investing short term funds by the banks. The borrower has
an advantage of raising funds against its securities without altering its asset mix and
lender finds a safe way of getting attractive returns. Moreover, both, the borrower and
lender improve their fund management because the date of reversal of transaction is
known in advance.