Repo is a repurchase agreement entered into between eligible counterparties for borrowing and lending of funds on a collateralized basis. A repo involves selling of a security with the agreement to repurchase the same at a future date for a predetermined price. The seller of the security receives funds while the buyer of the security receives collateral for the funds he has lent. The rate at which the security will be repurchased in the 2nd leg of the repo is derived from the rate of interest payable on the funds lent and is known as repo rate.

Repo transactions are permitted between counterparties and in instruments permitted by the Reserve Bank of India. At present repoable securities include Central Government dated securities, Treasury Bills, State Development Loans and Govt of India Special Securities like Oil bonds, Food bonds, Fertiliser bonds. The entities permitted to undertake repo transactions include Scheduled Commercial Banks, Co-operative Banks, Primary Dealers, Mutual Funds, Insurance Companies and corporate entities.

A Reverse repo transaction involves the buying of securities and lending of short term surplus in the 1st leg and selling the security at a predetermined rate in the 2nd leg. A repo transaction for one counterparty becomes a reverse repo transaction for the the other counterparty.

Repo transactions facilitates banks to invest surplus cash for adjusting CRR position and also for adjusting SLR positions.