Determinants of the repo rate, Financial Management

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Repo rates vary from transaction to transaction. They depend upon a variety of factors like:

  • Collateral's quality

  • Repo term

  • Delivery requirement

  • Collateral's availability

  • Current central bank funds rate (current reserve bank funds rate)

  • Seasonal factors.

The repo rates are directly related to the credit quality and liquidity of the collateral, i.e. if the collateral is of high quality securities and is highly liquid, a lower repo rate is charged. If the collaterals are more price sensitive and less liquid a higher repo rate would be charged. The repo rates also depend on the term of the repurchase agreement. The maturity of the collateral has no effect on the repo rate. If the collaterals are delivered to lender, the repo rates would be low, but a higher repo rate would be charged if the securities are deposited in the bank of the borrower. Securities that are in high demand are known as hot collateral or special collaterals. Repo rates would be low when the collaterals to the loan are hot collateral. Inversely the repo rates would be high when the collaterals are of general nature. Repo rates are usually lower than the central bank's fund rates, as they are unsecured borrowing, while repo involves collateralized borrowing.


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