Repo Market
The repo market in India is a short-term money market where participants borrow funds by selling securities with a simultaneous agreement to repurchase them at a specified future date and price, enabling liquidity management by banks, mutual funds, primary dealers, and the RBI.
A repurchase agreement (repo) is economically a collateralised loan: the seller of the security is borrowing cash, and the buyer of the security is lending cash. The 'haircut' applied to the collateral value protects the cash lender against a fall in collateral prices. The repo rate — the implied interest rate embedded in the difference between the sale and repurchase prices — reflects short-term borrowing costs.
The RBI's policy repo rate is the rate at which it lends funds to banks under the Liquidity Adjustment Facility (LAF), effectively setting the floor for overnight money market rates. This is distinct from the market repo rate, which fluctuates based on interbank liquidity conditions and is often closely anchored to the RBI's policy rate.
Historically, the Collateralised Borrowing and Lending Obligation (CBLO) was the primary instrument for interbank collateralised borrowing. CBLO was developed by the CCIL in the early 2000s and became the most actively traded segment of India's money market. However, in November 2019, CBLO was replaced by the Tri-Party Repo (TREPS) platform, also operated by CCIL, offering enhanced collateral management and tri-party settlement services.
Eligible collateral for market repos in India includes Central Government securities, State Development Loans, and Treasury Bills. Corporate bonds are not routinely accepted as repo collateral in the RBI's LAF, though bilateral repos against a broader collateral set exist in the over-the-counter (OTC) market.
For mutual funds, repo activity primarily occurs through TREPS, where excess cash is placed overnight as collateral-secured lending. Liquid fund NAVs benefit from TREPS income. The RBI's MSF (Marginal Standing Facility) serves as the repo borrowing window of last resort for banks, capped at a specified spread above the policy repo rate. Understanding repo mechanics is fundamental to interpreting daily liquidity surplus or deficit data published by the RBI.