CA Foundation · Business Economics · Money Market
Which feature best distinguishes a Repo from an outright sale of a government security in the money market?
A repo involves selling a security with an agreement to buy it back at a pre-agreed price on a specified future date, making it a collateralised short-term borrowing. An outright sale permanently transfers ownership, and repo is neither unsecured nor limited to the RBI.
- AIt involves an agreement to repurchase the security at a pre-agreed price on a future dateCorrect
- BIt is a transaction with no collateral
- CIt transfers the security permanently
- DIt is a loan that can only be taken by the RBI
Explanation
A repo is a sale of securities with a simultaneous agreement to repurchase them at a fixed price on a later date, effectively a collateralised short-term loan. An outright sale permanently transfers the security. The other options are incorrect because repo is collateralised and is used by banks and others, not only the RBI.
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