Repo Facility

A repo facility is a standing arrangement through which a central bank deals with banks in repurchase agreements (repo) at a pre-announced rate, whenever the banks ask, usually overnight. In Pakistan, the term refers to the State Bank of Pakistan's (SBP) overnight repo facility, the floor of its interest rate corridor: a bank with spare cash at the end of the day can place it with the SBP, against government securities, and earn the floor rate, set 100 basis points below the policy rate.

The phrase is confusing because central banks do not agree on which side of the deal the name describes. The SBP names its facilities from its own point of view, so its "repo" is where the SBP takes in cash and its reverse repo is where it lends. The US Federal Reserve's Standing Repo Facility, by contrast, lends cash to dealers, and the Reserve Bank of India's "repo rate" is also its lending rate. Readers should always check which way the money flows.

Think of the central bank as a safe that is open every evening. A bank with more cash than it needs can lock the surplus in the safe overnight and collect a small, guaranteed fee in the morning. Because this option is always there, no bank will lend its spare cash to another bank for less than that fee.

That is why the deposit side of the corridor is called the floor. Overnight rates in the market cannot sink much below it, however much cash is sloshing around. A matching lending window at the top, the ceiling, stops rates rising too far when cash is short.

A repo is a sale of securities with an agreement to buy them back later at a slightly higher price. The difference is the interest. Every repo has two sides:

• The cash borrower sells the securities and later repurchases them. From its side, this is a repo.
• The cash lender buys the securities and later resells them. From its side, the same deal is a reverse repo.

Market convention usually names the trade from the dealer's or bank's side, which is why the Fed calls its cash-lending operations "repo" and its cash-absorbing ones "reverse repo". The SBP uses its own side. When a Pakistani bank places money at the SBP floor, the SBP sells it securities and buys them back next day: the SBP is borrowing, so the SBP calls it a repo, even though the bank is lending.

The SBP introduced its interest rate corridor in August 2009. The existing 3-day repo lending window, then known as the discount rate facility, became an overnight reverse repo facility forming the ceiling, and a new overnight repo facility was created as the floor. The corridor was 300 basis points wide at first, later narrowed, and in May 2015 the SBP added a separate policy (target) rate inside it. In March 2020 the corridor was made symmetric, with the ceiling and floor each 100 basis points from the policy rate, a 200-basis-point band.

Only scheduled banks and primary dealers can use the floor, against eligible government securities such as Market Treasury Bills (MTBs) and Pakistan Investment Bonds (PIBs). The floor rate is reset by an SBP circular whenever the policy rate changes. For example, when the SBP raised its policy rate to 11.5% in April 2026, it set the overnight repo floor at 10.5% and the reverse repo ceiling at 12.5%.

Day-to-day, the SBP tries to keep the overnight market rate near the policy rate through open market operations (OMOs). Heavy use of the floor shows that the system has more liquidity than banks can lend out, and the call money rate and repo rates drift towards the floor.

• United States. The Federal Reserve set up its Standing Repo Facility in July 2021 to lend cash overnight against Treasury and agency securities, with a minimum bid rate tied to the top of the federal funds rate target range. It acts as a ceiling, the opposite role to the SBP's repo floor.
• Euro area. The European Central Bank's deposit facility plays the floor role, but it takes unsecured deposits rather than repos; its marginal lending facility is the ceiling.
• India. The Reserve Bank of India's repo rate is its policy lending rate, and since 2022 a standing deposit facility, which takes cash without collateral, has formed the floor of its corridor.

Whatever the name, every corridor system needs a place where banks can always deposit and a place where they can always borrow. Rates set at these windows bound the overnight market, and through it KIBOR, interest rates on loans and the yield on Treasury Bills (TBs). The collateral taken also carries a haircut to protect the central bank. Repo facilities are part of the plumbing of monetary policy rather than a signal in their own right; the headline decision remains the policy rate.

• State Bank of Pakistan
• Federal Reserve Bank of New York: Repo and reverse repo operations