It is an innovative instrument issued by the RBI to eliminate movement of papers and facilitating easy rediscounting. DUPN is backed by up to 90 days Usance commercial bills. Government has exempted stamp duty on DUPN to simplify and steam-line the instrument and to make it an active instrument in the secondary market. The minimum rediscounting period is 15 days

Ready forward or Repos or Buyback deal is a transaction in which two parties agree to sell and repurchase the same security. Under such an arrangement, the seller sells specified securities with an agreement to repurchase the same at a mutually decided future date and a price. Similarly, the buyer purchases the securities with an agreement to resell the same to the seller on an agreed date in future at a prefixed price. For the purchaser of the security, it becomes a Reverse Repo deal. In simple terms, it is recognised as a buy back arrangement. In a standard ready forward transaction when a bank sells its securities to a buyer it simultaneously enters into a contract with him (the buyer) to repurchase them on a predetermined date and price in the future. Both sale and repurchase prices of securities are determined prior to entering into the deal. In return for the securities, the bank receives cash from the buyer of the securities. It is a combination of securities trading (involving a purchase and sale transaction) and money market operation (lending and borrowing). The repo-rate represents the borrowing/lending rate for use of the money in the intervening period. As the inflow of cash from the ready forward transaction is used to meet temporary cash requirement, such a transaction in essence is a short term cash management technique.

The motivation for the banks and other organizations to enter into a ready forward transaction is that it can finance the purchase of securities or otherwise fund its requirements at relatively competitive rates. On account of this reason the ready forward transaction is purely a money lending operation. Under ready forward deal the seller of the security is the borrower and the buyer is the lender of funds. Such a transaction offers benefits both to the seller and the buyer. Seller gets the funds at a specified interest rate and thus hedges himself against volatile rates without parting with his security permanently (thereby avoiding any distressed sale) and the buyer gets the security to meet his SLR requirements. In addition to pure funding reasons, the ready forward transactions are often also resorted to manage short term SLR mismatches.

Internationally, Repos are versatile instruments and used extensively in money market operations. While inter-bank Repos were being allowed prior to 1992 subject to certain regulations, there were large scale violation of laid down guidelines leading to the 'securities scam' in 1992; this led Government and RBI to clamp down severe restrictions on the usage of this facility by the different market participants. With the plugging of loophole in the operation, the conditions have been relaxed gradually.

RBI has prescribed that following factors have to be considered while performing repo:

1. purchase and sale price should be in alignment with the ongoing market rates

2. no sale of securities should be effected unless the securities are actually held by the seller in his own investment portfolio.

3. Immediately on sale, the corresponding amount should be reduced from the investment account of the seller.

4. The securities under repo should be marked to market on the balance sheet date.

The relaxations over the years made by RBI with regard to repo transactions are:

1. In addition to Treasury Bills, all central and State Government securities are eligible for repo.

2. Besides banks, PDs are allowed to undertake both repo/reverse repo transactions.

3. RBI has further widened the scope of participation in the repo market to all the entities having SGL and Current with RBI, Mumbai, thus increasing the number of eligible non-bank participants to 64.

4. It was indicated in the 'Mid-Term Review' of October 1998 that in line with the suggestion of the Narasimham Committe II, the Reserve Bank will move towards a pure inter-bank (including PDs) call/notice money market. In view of this non-bank entities will be allowed to borrow and lend only through Repo and Reverse Repo. Hence permission of such entities to participate in call/notice money market will be withdrawn from December 2000.

5. In terms of instruments, repos have also been permitted in PSU bonds and private corporate debt securities provided they are held in dematerialised from in a depository and the transactions are done in a recognised stock exchange.

Apart from inter-bank repos RBI has been using this instrument effectively for its liquidity management, both for absorbing liquidity and also for injecting funds into the system. Thus, Repos and Reverse Repo are resorted to by the RBI as a tool of liquidity control in the system. With a view to absorbing surplus liquidity from the system in a flexible way and to prevent interest rate arbitraging, RBI introduced a system of daily fixed rate repos from November 29, 1997.

Reserve Bank of India was earlier providing liquidity support to PDs through the reverse repo route. This procedure was also subsequently dispensed with and Reserve Bank of India began giving liquidity support to PDs through their holdings in SGL A/C. The liquidity support is presently given to the Primary Dealers for a fixed quantum and at the Bank Rate based on their bidding commitment and also on their past performance. For any additional liquidity requirements Primary Dealers are allowed to participate in the reverse repo auction under the Liquidity Adjustment Facility along with Banks, introduced by RBI in June 2000.

The major players in the repo and reverse repurchase market tend to be banks who have substantially huge portfolios of government securities. Besides these players, primary dealers who often hold large inventories of tradable government securities are also active players in the repo and reverse repo market.

DFHI is very active in the Repo Market. It has been selling and purchasing on repo basis T-Bills and eligible dated Government Securities.

Pursuant to the recommendations of the Narasimham Committee Report on Banking Reforms (Narasimham Committee II), it was decided in principle, to introduce a Liquidity Adjustment Facility (LAF) operated through repo and reverse repo since 5th June 2000.

Under this scheme, (i) Repo auctions (for absorption of liquidity) and (ii) reverse repo auctions (for injection of liquidity) will be conducted on a daily basis (except Saturdays). But for the intervening holidays and Fridays, the repo tenor will be one day. On Friday, the auctions will be held for three days maturity to cover the following Saturday and Sunday. With the introduction of the Scheme, the existing Fixed Rate Repo has been discontinued. The liquidity support extended to all scheduled commercial banks (excluding RRBs) and Primary Dealers through Additional Collaterialised Lending Facility (ACLF) and refinance/reverse repos under Level II, have also been withdrawn. Export Refinance and Collateralised Lending Facility (CLF) at Bank Rate will continue as per the existing procedures. Like-wise, Primary Dealers will continue to avail of liquidity support at level I at Bank Rate. The funds from the Facility are expected to be used by the banks/PDs for their day-to-day mismatches in liquidity.

Interest rates in respect of both repos and reverse repos will be decided through cut off rates emerging from auctions on "uniform price" basis conducted by the Reserve Bank of India, at Mumbai.