The RBI (India's Central Bank) website says that "predominantly, repos are undertaken on an overnight basis, i.e., for one day period."

So basically, the Central Bank buys securities from other commercial banks in the country and then resell them at a higher price back to these banks the next day (predominantly). My question is how could the commercial banks arrange more cash (i.e. with interest = repo rate) in one day to pay back the Central Bank, if they don't have enough money the previous day to carry out their transactions?

Also, in repo transactions, is the Central Bank buying the securities (with repurchase clause) from commercial banks, or is it keeping the securities just as a collateral? There seems to be an ambiguity in whether a repo transaction is sell-and-buy-back transaction or collateralized borrowing.


1 Answer 1


Repo Operations of United States Federal Reserve


Repos are a common secured money market transaction. In a repo transaction, the Desk purchases securities from a counterparty subject to an agreement to resell the securities at a later date. Each repo transaction is economically similar to a loan collateralized by securities, and temporarily increases the supply of reserve balances in the banking system.

Conversely, in a reverse repo transaction, the Desk sells securities to a counterparty subject to an agreement to repurchase the securities at a later date. Reverse repo transactions temporarily reduce the supply of reserve balances in the banking system.

Bank Assets, Liabilities, Income, and Expense


In the context of the simplified bank balance sheet and income statement if a bank uses repo liabilities to gain reserve assets (Cash in the paper under the link above) from the central bank then it pays interest on the repo liabilities under Other Interest Expense. For a bank making a profit this should be less than the Interest Income and Fee Income on average so the bank can rollover its liabilities in money markets and carry its portfolio of investments in credit markets. To clarify the bank can rollover its overnight repo positions without loss of profit and/or it can develop alternative liabilities to reduce its overnight repo position.


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