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Definition: Sale and Repurchase Agreement – SRA
It is an Open Market operation. It is used to modify the overnight interest rates and modify the money supply. Repurchase agreement is agreement, attached with sale of a security, that the security will be bought back by the seller at predefined time in future.
The repurchase price is called repo rate which is usually the previous sale price as interest also counts for intermediate period between two dates. Here the buying party of the securities are playing the same role as money lenders and the sellers of the security are playing the same role as borrowers, keeping their securities as collateral. So this is a mechanism for taking secured loan at a fixed interest rate.
If spot sale and forward contracts are combined it would be almost equivalent to a repo. Through spot sale money is transferred from borrower to lender in exchange of the security, while at the same time forward contract ensures the reverse process that securities will be given back to the borrower at a later point of time in exchange of loan repayment. The transaction will get settled on the maturity date of the loan. The interest is calculated by forward price minus spot price.
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