The rate of interest at which commercial banks borrow money, for short-term periods, from the central bank in a given country, for liquidity purposes. Lending, by means of a repo, is collateralized by a given type of securities (such as government bonds or treasury bills). Technically, a commercial bank sells its security holdings, in the tune of the required loan, to the central bank, while agreeing to repurchase these securities later on as set out in the contract. The difference between the repurchase price and the original sale price represents the repo return (or repo interest). A repo rate differs from a repo return.
A repo rate is the return (earned on a repo transaction) expressed as an interest rate on the cash leg of the transaction.
It is also known as a repurchase rate.
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