Repo Rate

In a repurchase agreement, the difference between the sale price and the repurchase price represents the interest paid by the borrower. Expressed as an annual percentage, this is the repo rate.

For example, a bank that sells bonds for 10,000,000 and agrees to buy them back the next day for 10,001,000 is effectively paying 1,000 in interest for one night, equal to an annual repo rate of about 3.6% on a 365-day basis.

Market repo rates reflect the supply and demand for short-term secured funding and the quality of the collateral. They are watched closely as a sign of conditions in funding markets. In the United States, SOFR is based on repo transactions.

In several countries, including India and South Africa, the repo rate is the central bank's key policy rate, the rate at which it lends to commercial banks against collateral. Changes in this rate influence borrowing costs across the economy, much like the federal funds rate in the United States.