Term Repos

Term repos are an important monetary policy and liquidity management instrument used by central banks to regulate short- to medium-term liquidity conditions in the financial system. In India, term repo operations have emerged as a key tool for improving monetary transmission, stabilising money markets, and strengthening the effectiveness of policy signals. Their relevance is particularly significant in the context of banking and finance, where liquidity mismatches and interest rate volatility can affect credit flow and economic growth.
Unlike overnight repo operations, term repos provide liquidity for a fixed period beyond one day, thereby offering greater certainty to banks regarding funding costs and availability. This feature has enhanced their importance in India’s evolving monetary and financial framework.

Concept and Meaning of Term Repos

A term repo is a repurchase agreement in which the central bank lends funds to commercial banks for a specified tenor against eligible collateral, usually government securities. Under this arrangement, banks agree to repurchase the securities at a predetermined date and interest rate, known as the repo rate.
The defining feature of term repos is their longer maturity, typically ranging from seven days to fourteen days, though longer tenors may be introduced depending on liquidity conditions. By locking in funding for a defined period, term repos reduce banks’ dependence on volatile overnight borrowing and promote more stable liquidity management.

Evolution of Term Repos in India

Term repos were introduced in India as part of broader monetary policy reforms aimed at strengthening the interest rate transmission mechanism. Traditionally, liquidity adjustment in India relied heavily on overnight repo and reverse repo operations. However, excessive dependence on overnight liquidity often resulted in short-term volatility in money market rates.
To address this issue, the Reserve Bank of India gradually increased the share of liquidity provided through term repo auctions. This shift encouraged banks to manage liquidity on a more durable basis and aligned short-term market rates more closely with the policy repo rate.

Objectives of Term Repo Operations

The primary objective of term repos is to provide assured liquidity to banks while reinforcing the policy interest rate as the main operating target of monetary policy. By offering funds for longer tenors, the central bank reduces uncertainty in interbank markets and moderates excessive rate fluctuations.
Term repos also aim to improve monetary transmission by ensuring that changes in the policy repo rate are reflected more effectively in banks’ lending and deposit rates. Stable funding conditions enable banks to price loans more efficiently, thereby influencing credit growth and investment decisions in the economy.

Role in Banking Liquidity Management

For banks, term repos serve as a predictable and relatively low-cost source of short-term funding. They help banks manage asset-liability mismatches, meet statutory liquidity requirements, and maintain adequate cash balances. Access to term repo funding is particularly valuable during periods of tight liquidity or heightened market stress.
By reducing reliance on overnight borrowing, term repos encourage better liquidity planning and risk management within banks. This contributes to overall financial stability, as sudden liquidity shocks are less likely to disrupt banking operations.

Impact on Money Markets

Term repo operations have had a stabilising effect on Indian money markets. By providing liquidity at longer maturities, they help anchor short-term interest rates around the policy repo rate. This reduces volatility in call money and other short-term segments of the money market.
Greater stability in money market rates enhances confidence among market participants and improves the efficiency of financial markets. It also supports the smooth functioning of other money market instruments such as treasury bills, commercial paper, and certificates of deposit.

Significance for Monetary Policy Transmission

Effective monetary policy transmission is essential for influencing inflation, growth, and financial conditions. Term repos strengthen this transmission by ensuring that policy signals are not diluted by liquidity frictions. When banks have assured access to central bank liquidity at the policy rate, changes in monetary stance are transmitted more directly to the broader economy.
In the Indian context, where structural liquidity deficits have often existed, term repos have played a crucial role in aligning market rates with policy intentions. This has enhanced the credibility and effectiveness of monetary policy actions.

Relevance to the Indian Economy

At the macroeconomic level, term repos support orderly credit expansion and financial stability. By smoothing liquidity conditions, they enable banks to continue lending to productive sectors even during periods of stress. This is particularly important for an economy like India, where bank credit is a primary source of funding for businesses and households.
Stable liquidity conditions also support government borrowing programmes by ensuring smooth absorption of government securities without excessive interest rate volatility. In this way, term repos indirectly contribute to fiscal stability and economic growth.