Definition of repo and reverse repo

Repo in normal financial parlance means repurchase agreement

The person who supplies Govt. the security and borrows and agrees to later sell and repay the money. Reverese repo is the other side of the transaction.

A financing arrangement used primarily in the government securities markets whereby a dealer or other holder of government securities sells the securities to a lender and agrees to repurchase them at an agreed future date at an agreed price which will provide the lender with an extremely low risk return. Such a transaction is called a repo when viewed from the perspective of the supplier of the securities (the party acquiring funds) and a reverse repo or matched sale-purchase agreement when described from the point of view of the supplier of funds. There will be an underlying interest component in this.

Repo in the Indian banking context means the rate at which RBI does short term lending to the banks or the Banks borrowing from RBI
Reverse repo is the opposit where RBI borrows from Banks or the Banks lend to RBI
Repo rate for obvious reasons will be more than the reverse repo in this banking context. RBI makes the spread between repo ( lending rate )and reverse repo( borrowing rate), that is the rate at which lends to banks and rate at which it borrows from banks.

In a situation where repo rate is raised without any increase in reverse repo RBI will have a greater spread atthe cost of the Banks

Example

Current repo rate say 7%
Reverse repo rate is 6.5%

When RBI increase Repo rate , say by 50 basis points, the newrepo rate at 7.5% with no change in reverse repo , will increase the spread that RBI makes to 1.00%