REPO, repurchase agreement or a ready forward sale, are all terms for a sale and repurchase agreement in money markets. It is a transaction whereby banks and other financial institutions raise and invest short-term funds. Thus while the party which sells securities with a promise to buy them back is actually borrowing money, the purchasers of the securities in the first instance finds the repo a money market investment.
Dealers use repo extensively to finance their positions.
It has also limited the number of players who are allowed to do repos to very few market participants such as banks and primary dealers. Unlike a general borrowing or lending transaction in the money markets, repos are much safer as the lender holds government securities in his own name, and it is therefore a zero risk transaction for him. The second purpose it solves is that it helps banks in meeting their mandatory requirements for investing in government securities. Under the law, banks are required to invest a certain portion of their deposits in government securities. If their holdings are not up to the prescribed level, they are liable for punitive action.