Repo Agreement or Repurchase Agreement is a short-term financial arrangement commonly used in money markets, allowing one party to sell securities to another with a promise to repurchase them at a later date for a predetermined price. This mechanism serves as a secure way for institutions to raise short-term capital while offering investors a low-risk investment avenue.

In a repo transaction, the seller of the securities (borrower) agrees to repurchase them after a specific period, usually overnight or within a few days. The difference between the selling price and the repurchase price represents the repo rate—essentially the cost of borrowing funds. Central banks, including the Reserve Bank of India (RBI), use the repo rate as a key monetary policy tool to control liquidity and inflation in the economy.

Types of repo agreements include overnight repos, term repos, and reverse repos. While an overnight repo lasts for a single day, a term repo extends for a longer duration. In a reverse repo, the buyer of securities lends funds with an agreement to sell them back later—thus temporarily absorbing excess liquidity from the market.

Repo agreements play a vital role in maintaining financial market stability. They help banks manage short-term funding needs, enable efficient liquidity flow, and support the functioning of the bond market. For investors, repos offer a low-risk, collateral-backed investment option. For policymakers, they serve as an effective instrument for regulating money supply.

Overall, repo agreements form a cornerstone of modern financial markets, balancing liquidity, interest rates, and credit flow across the economy while ensuring stability in short-term money market operations.