Reverse Repo Normalisation
- January 27, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
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Reverse Repo Normalisation
Subject – Economy
Context – The State Bank of India’s economic research team believes the stage is set for a reverse repo normalisation, given that the Triparty Repo Dealing and Settlement (TREPS) and call money rates are ruling higher than the reverse repo rate
Concept –
- Normalisation means raising the reverse repo rate in one or two stages.
Repo and Reverse Repo Rate:
- Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Here, the central bank purchases the security.
- Reverse repo rate is the rate at which the RBI borrows money from commercial banks within the country.
Liquidity Adjustment Facility (LAF):
- It is a tool used in monetary policy by the RBI that allows banks to borrow money through repurchase agreements (repos) or for banks to make loans to the RBI through reverse repo agreements.
Triparty Repo
- A triparty repo is an alternate repo arrangement which seeks to provide borrowers control over their unencumbered collateral, with minimal settlement costs to the lender and independent confirmation that their lending is fully collateralised.
- In this arrangement, the borrower delivers the collateral to an independent custodian, which places the same in a segregated triparty collateral account.
- The borrower has control over the securities in the account, while the custodian ensures that the lender is always collateralised with securities of acceptable asset quality.
Key features of triparty repo
- Triparty repo trades’ securities settle on the books of the triparty agent and cash moves between the lenders and borrower’s respective accounts.
- In a triparty repo the borrowers (collateral providers) finalize their securities allocation decision later in the day, unlike in a bilateral repo transaction where they have to deliver the specific security earlier during the day.
- The securities given as collateral in a triparty repo cannot be re-pledged outside the triparty platform. In the case of a bilateral repo, lenders receive control over the securities posted as collateral.
- Triparty repo involves a “general collateral” transaction, where the lender receives any security within the specified security class acceptable to it. In the case of a bilateral repo, the specific security agreed at the time of the transaction has to be delivered.
- Simplified legal documentation for instant access to a large number of counterparties.