Repo (Repurchase Agreement)

How it works

In a repurchase agreement, the borrower sells securities (usually government bonds) to a lender for cash and agrees to repurchase them at a set, slightly higher price on a future date — very often the very next day. The difference between the sale price and the repurchase price is effectively the interest on what is really a collateralised loan. The securities act as collateral, which makes repos very low-risk for the lender.

Repos are the essential plumbing of short-term money markets, letting institutions borrow and lend cash efficiently against safe assets without much credit risk.

In India

The version most Indians know is the RBI repo rate — the rate at which banks borrow short-term funds from the RBI against G-Secs as collateral. It is the RBI's primary policy tool: cut it and borrowing gets cheaper right across the economy; raise it to cool down demand and rein in inflation. As of 2026, the repo rate sits around 5.25% after the 2025 cutting cycle.

Beyond the RBI, a market repo also exists, where banks and institutions lend to one another, and debt mutual funds routinely use repos to manage liquidity and earn safe short-term returns on idle cash.

Why it matters

The repo rate anchors home-loan EMIs, deposit rates and bond yields, so it touches nearly every borrower and saver in the country. Understanding repos also explains how money markets and liquid funds generate their steady, low-risk returns — largely through collateralised lending of exactly this kind.

Common mistakes

Don't conflate the policy repo rate with the actual lending rate on your loan — transmission to your EMI depends on your loan's benchmark (repo-linked versus an older MCLR). And recognise that a repo is a secured loan, not a permanent sale; the securities always return to the original holder on the agreed date. It is precisely that collateral that makes repos so safe.