A repurchase transaction is a collateralised loan that is effected through the sale and subsequent repurchase of a security at a specified date and price. Central banks typically use repurchase transactions as an instrument to manage short-term liquidity in the market, for signalling the monetary policy stance and, in some cases, as a means of developing a secondary market for Government securities.

Repurchase transactions are very useful to central banks for monetary policy because they are flexible. Their features, namely amount, frequency, interest rate, maturity and tender system, can be tailored to liquidity conditions. For central banks using the repo rate as the key policy rate, a change in the repo rate signals a shift in monetary policy. In countries where some other rate plays this role, repurchase transactions can still be used to signal the stance of monetary policy or the likely direction of the key official rate. In between regular auctions, a central bank can use repurchase transactions to respond to temporary and unexpected changes in liquidity in order to keep monetary policy on track. Such action tends to reduce volatility in reserves and overnight interest rates and to promote the development of the market for Government securities.

The Bank of Mauritius started, with effect from 15 December 1999, to conduct through an auctioning process repurchase transactions with commercial banks in Government of Mauritius Treasury Bills. Under a repo, the Bank of Mauritius supplies liquidity to the market by purchasing eligible securities from commercial banks with the agreement to resell them at a specified price on a given future date. Under a reverse repo, the Bank of Mauritius absorbs liquidity from the market by selling eligible securities to commercial banks with the agreement to repurchase them at a specified price on a given future date. The interest rates on repurchase transactions are determined by the bids received through the auctions. Both repos and reverse repos are conducted under the umbrella of a Master Repurchase Agreement, which has been signed by the Bank of Mauritius and commercial banks.

The amount to be transacted, the term of the transactions, the procedures in all repurchase transactions and the underlying securities are determined by the Bank of Mauritius. Currently, the duration of repurchase transactions varies between overnight to a maximum of 7 days and only commercial banks are eligible to deal in repurchase transactions with the Bank of Mauritius. However, the list of counterparties may be extended subsequently to include non-bank financial institutions also.