A repo, or repurchase agreement, is a contract to sell and subsequently repurchase a security on a specified date at an agreed price, in order to raise short-term capital. They have become a key source of capital market liquidity. Previously viewed as a primarily back-office activity in the 1990s, repos are now integral components of the banking industry’s treasury, liquidity and assets/liabilities management disciplines.
When government central banks repurchase securities from private banks, they do so at a discounted rate, known as the repo rate. Like prime rates, repo rates are set by central banks. The repo rate system allows governments to control the money supply within economies by increasing or decreasing available funds. A decrease in repo rates encourages banks to sell securities back to the government in return for cash. This increases the money supply available to the general economy. Conversely, by increasing repo rates, central banks can effectively decrease the money supply by discouraging banks from reselling these securities.themes.