About Repos and Reverse Repos:

• In the era of economic reforms there developed two new instruments of money market-repo and reverse repo.
• Considered the most dynamic instruments of the Indian money market they have emerged the most favored route to raise short-term funds in India.
• ‘Repo’ is basically an acronym of the rate of repurchase.
• The RBI in a span of four years, introduced these instruments-repo in December 1992 and reverse repo in November 1996.
• Repo allows the banks and other financial institutions to borrow money from the RBI for short-term (by selling government securities to the RBI).
• In reverse repo, the banks and financial institutions purchase government securities from the RBI (basically here the RBI is borrowing from the banks and the financial institutions).
• All government securities are dated and the interest for the repo or reverse repo transactions is announced by the RBI from time to time.
• The provision of repo and the reverse repo have been able to serve the liquidity evenness in the economy as the banks are able to get the required amount of funds out of it, and they can park surplus idle funds through it.
• These instruments have emerged as important tools in the management of the monetary and credit policy in recent years.

Source: The Hindu