What does reverse repo mean?

A reverse repurchase agreement (reverse repo) is a financial transaction in which one party sells securities to another party with the commitment to repurchase the same securities at a later date, typically at a slightly higher price. This type of transaction is commonly used by central banks and other financial institutions to manage their liquidity and short-term cash needs. In a reverse repo, the party selling the securities (the borrower) receives cash from the party buying the securities (the lender) and agrees to repurchase the securities at a later date, usually within a few days or weeks. The lender earns interest on the cash they provide, and the borrower pays interest on the cash they receive, effectively making it a short-term collateralized loan. Reverse repos are often used by central banks to control the money supply and manage interest rates. By engaging in reverse repos, central banks can temporarily remove cash from the financial system, which can help to reduce inflationary pressures and stabilize short-term interest rates. In addition to central banks, reverse repos are also used by other financial institutions, such as commercial banks and money market funds, to manage their short-term cash positions and earn a return on their excess funds. Overall, reverse repos play a crucial role in the financial markets by providing a mechanism for managing liquidity, controlling interest rates, and facilitating short-term borrowing and lending of securities.