Repo and reverse repo

What is repo

A repo (repurchase agreement) is a short-term loan in which one side sells securities and agrees to buy them back later at a slightly higher price. The securities act as collateral, and the price difference is the interest.

A reverse repo is the same deal seen from the other side. That party buys the securities and agrees to sell them back, so it is lending cash against collateral.

Repo rate meaning: the repo rate is the interest implied by the gap between the sale price and the repurchase price. It is quoted as an annual rate.

Formal definition

Legally, a repo is a sale and repurchase, not a pledge. The cash lender takes legal title to the securities for the life of the deal. That matters if the borrower defaults: the lender can keep or sell the collateral without going through the borrower's insolvency process. Economically, the deal is a secured loan.

Terms an experienced reader will meet:

• Haircut: the lender gives less cash than the market value of the collateral. This protects it if the collateral loses value.
• Overnight vs term repo: overnight repos end on the next business day. Term repos run for a fixed period.
• Margin call: if the collateral price falls during the deal, the borrower may have to add securities or cash.
• Tri-party repo: a third-party agent holds and values the collateral. See custodian and clearing and settlement.
• Naming depends on perspective: central banks sometimes label their operations from their own side and sometimes from the banks' side. Always read how a release defines "repo" before interpreting it.

Worked example (hypothetical)

Bank A needs cash until tomorrow. Bank B has spare cash.

1. Bank A sells government Treasury bills to Bank B for an agreed amount of cash. The cash is less than the bills' market value because of the haircut.
2. Both banks agree that Bank A will buy the bills back tomorrow at a slightly higher price.
3. Tomorrow, Bank A pays the higher price and gets its bills back.

For Bank A this was a repo. For Bank B it was a reverse repo.

To get the repo rate from such a deal:

• Divide the price difference by the sale price.
• Scale the result to a year using the day-count basis in the agreement.

If Bank A cannot pay tomorrow, Bank B keeps the bills and sells them. This is why the counterparty risk in a repo is lower than in an unsecured loan.

Where you see the term

• Central bank news: the State Bank of Pakistan uses repo-type operations to steer short-term rates. It describes these as "SBP Policy Rate & Interest Rate Corridor Facilities". Its latest announced decision reads: SBP policy rate raised by 50 bps to 12% with effect from 27.10.2026 (MPC). Rate changes are often stated in basis points.
• Market reports: "open market operations" and "reverse repo injections" describe the central bank adding or draining cash in the banking system.
• Funding stress: a sudden rise in repo rates or haircuts can signal a credit crunch.

For traders, policy and repo rate moves feed into currency pricing and into overnight financing on leveraged positions. See swap fees and fundamental analysis. Leveraged forex and CFD trading can lose money fast, including around rate decisions.

Related terms

• Collateral
• Central counterparty
• Forward contract
• Fractional reserve banking
• Face value
• Bond auction
• Trading glossary

Frequent questions

What is repo in simple words?

A repo is a short-term loan where the borrower sells securities and buys them back later at a higher price. The difference is the interest.

What is the reverse repo meaning?

Reverse repo is the lender's side of the same deal. The lender buys the securities now and sells them back later.

Is a repo a sale or a loan?

Legally it is a sale and repurchase. Economically it works as a secured loan.

What is the repo rate meaning in the news?

In news, the repo rate usually refers to the rate at which a central bank lends to or takes cash from banks. Check the release for which side it describes.

Does the repo rate affect forex prices?

It can feed into interest rate expectations, which are one of many factors in currency prices. It does not tell you where a price will go.