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What is Repo Rate?

Welcome to the Investors Trading Academy talking glossary of financial terms and events. Our word of the day is “Repo Rate” The discount rate at which a central bank repurchases government securities from the commercial banks, depending on the level of money supply it decides to maintain in the country's monetary system. To temporarily expand the money supply, the central bank decreases repo rates (so that banks can swap their holdings of government securities for cash). To contract the money supply it increases the repo rates. Alternatively, the central bank decides on a desired level of money supply and lets the market determine the appropriate repo rate. Repo is short for repossession. The rate of return that can be earned by simultaneously selling a bond futures or forward contract and then buying an actual bond of equal amount in the cash market using borrowed money. The bond is held until it is delivered into the futures or forward contract and the loan is repaid. The implied repo rate comes from the reverse repo market, which has similar gain/loss variables as the implied repo rate. All types of futures and forward contracts have an implied repo rate, not just bond contracts. For example, the price at which wheat can be simultaneous purchased in the cash market and sold in the futures market (minus storage, delivery and borrowing costs) is an implied repo rate. In the mortgage-backed securities TBA market, the implied repo rate is known as the dollar roll arbitrage. By Barry Norman, Investors Trading Academy