A repo rate is 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).

On the other hand, a repo margin (repo haircut) is the amount by which the market value of the security used as collateral exceeds the face value of the loan. The repo margin is typically proportionate to credit worthiness of the borrower: the lower the credit worthiness, the higher the repo margin, and vice versa. Generally, repo margin could range between 1% (100 basis points) and 3% (300 basis points). For low quality borrowers and collateral it could spring up to 10% (1000 basis points).

A repo rate differs from a repo margin. A repo rate is the return (earned on a repo transaction) expressed as an interest rate on the cash leg of the transaction. A repo margin is the difference between the market value of the collateral and the face value of the loan (loan securities). The former is a rate of interest that compensates the lender of money against the risk involved and the time value of money in addition to a specific premium, while the latter is a form of negative adjustment that reduces the value of the collateral as a reduction, or deduction applied to the value of the securities posted by the borrower and held by the lender in order to guarantee contractual fulfillment. In other words, it is the amount by which the sum borrowed against the collateral is less than the market value. This difference or discount helps protect the lender against changes in the market value of the collateral.