Monday, January 29, 2007

Repo rate and Reverse repo rate surya@iim k

The repo is the rate at which the RBI lends to banks while the reverse repo is the opposite. For a bank, repo is the borrowing rate SOCI security out, cash in, you can remember by thinking about the Russian resort SOCHI. The mirror image for the central bank(RBI) is SICO security in cash out. The other terms used for Repos are SFT and overnight borrowings
Follwing has been taken from a reverse repo auction notice on RBI site:
11. The successful tenderer’s Current Account with RBI will be debited as per the current procedure under Reverse Repo facility. Securities will be credited into the tenderer’s RRC SGL Account simultaneously. On the date of reversal, the tenderer’s RRC SGL Account will be debited and Current Account credited with the reverse repo amount and interest earned. For instance, in a Reverse Repo auction where bid amount accepted is Rs.420 crore at a rate of 4.75 per cent the calculations of amount of cash outflow in the first leg and amount of cash inflow in the second leg (with interest) will be as under.

Leg 1: Tenderer’s Current Account Dr. Rs. 420 Cr.
Tenderer’s RRC SGL Account Cr. Rs. 441 Cr = (Amt.of bid * 105) /100

Leg 2: Tenderer’s RRC SGL Account Dr. Rs. 441 Cr
Tenderer’s Current Account Cr. Rs 420,05,46,575 = (Amt. of bid + Interest for 1 day at 4.75%)

Lending rate > Borrowing rate
I have been grappling and googling with these terms. Central bank gives money"Hard Liquid CASH!!" to Banks who pledge government securities.
Repo(Repurchase):RBI Lends money: A short loan with security as collateral
Mirror Image
Reverse Repo: RBI Borrows money: Money deposited with RBI by Buyer of the security


Now any money making machine would want to keep the inflow of cash more than the outflow. So it charges more for outflow than for inflow and there-in lies the arbitrage.This is similar to currency traders who will give less rupees for $ , but when you go to buy $ you have to pay more rupees.