Repo and Reverse Repo
Repo (Repurchase Agreement)
A Repo is a monetary policy instrument used by Nepal Rastra Bank (NRB) to inject short-term liquidity into the banking system when there is a temporary liquidity shortage. Based on the decision of the Open Market Operations Committee, NRB conducts Repo operations to provide short-term liquidity to banks and financial institutions.
On the day of issuance, funds are deposited into the NRB accounts of successful bidders (banks and financial institutions) through an auction process. This provides temporary liquidity for a specified period.
The Repo auction uses a multiple interest rate system. Before funds are transferred, the successful bidders must submit government securities (such as Treasury Bills or Development Bonds) they own, equivalent to 110% of the allotted amount, as collateral to NRB.
On the maturity date, after the borrowed Repo amount is repaid, NRB returns the securities placed as collateral to the respective institutions.
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Reverse Repo
A Reverse Repo is a monetary tool used by Nepal Rastra Bank to absorb excess short-term liquidity from the banking system. When there is surplus liquidity, based on the decision of the Open Market Operations Committee, NRB uses the Reverse Repo to mop up excess funds.
On the issuance day, NRB withdraws funds from the NRB accounts of successful bidders, thereby reducing liquidity for the specified term.
Among the participating banks and financial institutions, those offering the lowest interest rates are given priority, and the allotted amount is distributed accordingly.
To conduct Reverse Repo operations, NRB places its own government securities (e.g., Treasury Bills) as collateral. On the maturity date, the amount initially withdrawn is returned to the participants' NRB accounts along with the interest in a lump sum.
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Participation Requirement
Any institution wishing to participate in Repo or Reverse Repo auctions must have a Master Repurchase Agreement with Nepal Rastra Bank. Without this agreement, participation in these operations is not allowed.
Repo (Repurchase Agreement) and Reverse Repo are financial transactions involving the buying and selling of securities with a promise to repurchase them at a later date. Repo is a transaction where one party sells securities to another with an agreement to buy them back, while reverse repo is the other side of the same transaction, where one party buys securities from another with an agreement to sell them back.
Repo (Repurchase Agreement):
Definition:
A repo is a secured loan where one party (the seller) sells securities to another party (the buyer) with a commitment to repurchase the same securities at a later date and a higher price.
Purpose:
Repos are used by parties that need to borrow funds, like securities dealers financing their inventory, or by central banks to manage liquidity.
Example:
A bank might sell government bonds to a central bank with the agreement to repurchase them later. The bank is effectively borrowing money from the central bank, and the securities serve as collateral.
Reverse Repo:
Definition:
Reverse repo is the opposite of a repo. It's a transaction where one party (the buyer) purchases securities from another party (the seller) with an agreement to sell them back at a later date and a higher price.
Purpose:
Reverse repos are used by parties that need to borrow securities, like securities dealers engaging in short sales, or by central banks to manage liquidity.
Example:
A central bank might purchase government bonds from a bank with the agreement to sell them back later. The bank is effectively lending money to the central bank, and the securities serve as collateral.
In essence:
Repo is like a secured loan, where the borrower (the seller) borrows funds and uses securities as collateral.
Reverse repo is like a secured deposit, where the lender (the buyer) provides funds and receives securities as collateral.
Example:
Let's say Bank A wants to borrow funds and Bank B wants to lend funds. Bank A (the seller) sells some government bonds to Bank B (the buyer) with the agreement that Bank A will buy them back at a higher price in a week. This is a repo.
From Bank B's perspective, it's a reverse repo because Bank B is buying the bonds and will sell them back to Bank A.
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