Classification of Repo Market
In this article, we are going to discuss what are the Types of Repo Market Operating in India. The repo markets operating in India can be broadly classified into two major types, based on the nature of securities used for repo transactions.
Types of Repo Market Operating in India
1. REPO ON SOVEREIGN SECURITIES :
What is typically known as ‘Repo market in India’ is the repo market based on sovereign securities. It has got actually three different functional segments :
- RBI Repo or Liquidity Adjustment Facility Repo (LAF) at a fixed rate set by RBI in their quarterly policy review. Reverse repo rate is the rate of interest at which the RBI borrows funds from other banks in the short term. Like the repo, this is done by RBI selling government bonds to banks with the commitment to buy them back at a future date. This rate is the policy rate of the country. If the RBI wants to make it more expensive for banks to borrow money, it increases this repo rate or LAF.
- Market repo among banks and institutions at market determined rates. Market repo rate is determined by the credit worthiness of the borrower, liquidity of the collateral and comparable rates of other money market instruments. Being a collateralised loan, its rate is generally lower than the unsecured call money rates.
- Term Repo under the Liquidity Adjustment Facility (LAF) for 14 days and 7 days tenors for banks (scheduled commercial banks other than RRBs) introduced since October 2013, in addition to the existing daily LAF (repo and reverse repo), but the rates are market determined.
- In other words, an increase in the repo rate will lead to liquidity tightening and vice-versa, other things remaining constant.
- The policy framework of the RBI aims at setting the repo rate based on a forward looking assessment of inflation, GDP growth and other macroeconomic risks, and modulation of liquidity conditions to anchor money market rates at or around the repo rate.
- The banks use the reverse repo facility to deposit their short-term excess funds with the RBI and earn interest on it. An increase in the reverse repo rate will decrease the money supply and vice-versa, other things remaining constant. An increase in reverse repo rate means that commercial banks will get more incentives to park their funds with the RBI, thereby decreasing the supply of money in the market.
2. REPO ON CORPORATE DEBT SECURITIES :
- As part of the measures to develop the corporate debt market, RBI has permitted following entities to undertake repo in corporate debt securities since January 2010 :
- Scheduled Commercial Banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs)
- Primary Dealers (PDs)
- All-India Financial Institutions
- Non-Banking Financial Companies (NBFCs)
- Mutual funds
- Housing Finance Companies
- Insurance Companies
- This is similar to repo in Government securities except that corporate debt securities are used as collateral for borrowing funds.
- Only listed corporate debt securities that are rated ‘AA’ or above by the rating agencies are eligible to be used for repo. Commercial paper, certificate of deposit, non-convertible debentures of original maturity less than one year are not eligible for the purpose.
3. OTHER REPOS
- CBLO segment operated by CCIL and SLBM operated by stock exchanges under the jurisdiction of SEBI are also treated as variants of the repo market in India.
- CBLO : Collateralized borrowing and lending obligations (CBLOs) is operated by the Clearing Corporation of India Ltd. (CCIL) and Reserve Bank of India (RBI). CBLOs allow short-term loans to be secured by financial institutions, helping cover their transactions. To access these funds, the institution must provide eligible securities as collateral—such as Treasury Bills that are at least six months from maturity.
- SLBM : Stock Lending & Borrowing Mechanism is a system in which a trader can borrow shares that they do not already own or can lend the stocks that they own. An SLB transaction has a rate of interest and a fixed tenure. For example, you have a negative view on the price of a stock. You can borrow shares from SLB and sell them. You can buy them back if and when the price falls. Your profit is the difference between the selling price and the buying price, after deducting the interest rate.