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.

Repo return, on the other hand, is the interest earned by the lender (repo buyer) in a repo transaction. It is the amount of money paid on the cash that is lent out to the borrower (repo seller) or the party posting the collateral. In essence, it is a money market rate corresponding to the repo maturity. This rate, in turn, is a function of the base rate (published by a central bank) and the supply/ demand in the money market and repo market. From the perspective of the seller (i.e., the amount paid by the seller), the repo return is expressed as follows:

Repo return = repurchase price – sale price

Though repo return is sometimes known as the repo rate, but the two concepts practically differ in the sense that the repo rate is the return (earned on a repo transaction) expressed as an interest rate on the cash leg of the transaction. Repo return is calculated as the difference between the repurchase price and the original sale price of the collateral posted (the securities), while repo rate is the interest rate corresponding to one leg of the transaction (the cash leg).