Whenever the banks have any shortage of funds they can borrow it from RBI. Repo rate is the rate at which our banks borrow rupees from RBI. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.
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[A Repo deal is one where eligible parties enter into a contract with another to borrow money against at a pre-determined rate against the collateral of eligible security for a specified period of time. The legal title of the security does change. The motive of the deal is to fund a position. Though the mechanics essentially remain the same and the contract virtually remains the same, in case of a reverse Repo deal the underlying motive of the deal is to meet the security / instrument specific needs or to lend the money. Indian Repo Market is governed by Reserve Bank of India. At present Repo is permitted between permitted 64 players against Central & State Government Securities (including T-Bills) only at Mumbai. Source: www.fimmda.org]
Normally for the repo and reverse repo auctions amount is periodically published by the RBI and the targets are mainly given to the primary dealers. When the RBI feels that there is excess liquidity in the system, it will focus more on reverse repos and vice versa.
Repo transactions can be made for a period which commences with an overnight and maximum period is 14 days. However overnight repos are popular. When repo rate increases, it clearly gives signals of increase in the overall rates of interest. Both are rates are also known as the policy rates and are extremely useful weapons to the regulator.
