Difference Between Bank Rate and Repo Rate

April 10, 2024 in Property Guide

Difference Between Bank Rate and Repo Rate

Bank and repo rates are the two most important rates for circulating credit activities. The central and commercial banks often factor in these values to keep track of borrowing and lending activities. Based on these rates, central banks, such as the RBI in the case of India, fund commercial banks and financial institutes. The Reserve Bank of India presides over the meeting and decides the bank and repo rate. The rates are chosen based on certain factors that further determine the difference between the two.

This article explains the key differences between the repo rate and the bank rate. But, before that, you need to know the definition, features and impacts for clear understanding.

What is the Repo Rate?

Repo rate refers to the rate at which any country's central bank provides funds to financial institutions in case of fund shortage. For India, the RBI provides funds to the respective banks if they have a deficit. This way, the monetary authorities use the repo rate to control inflation. But how does that happen?

When inflation rises, the central banks often increase the repo rate. This measure is taken to disincentivise commercial banks from borrowing. As a result, it helps to reduce the money supply within the economy, which further aids in controlling inflation. The central banks usually take the front seat in controlling inflation, with the repo rates forming an important part of the liquidity adjustment facility. Familiarising with the repo rate features can help you understand its effectiveness during inflation.

Features

The repo rate is often considered an anchor for economic stability during inflation. Some of the major features of repo rate are as follows:

  • The repo rate can have a shorter tenure of around one day.
  • The RBI presides over the Monetary Policy Committee meetings for determining the repo rate.

Impact

RBI has the authority to change the repo rate to maintain liquidity in the market. When the repo rate is high, borrowing becomes costlier for banks. This prevents banks from infusing too much capital into the market. RBI usually takes this step to curb inflation.

What is the Bank Rate?

Bank rate refers to the rate that the central banks charge to commercial banks when the former provides a loan to the latter. Commercial banks borrow money from the RBI to ensure smooth operations in case of fund shortage.

The borrowing is done as per the monetary policies of India. The bank rates often influence the lending rate for commercial banks. If the lending rate is higher, it will mean that the bank rate will be higher, too. The central bank can increase and reduce bank rates to curb liquidity.

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Features

Some of the major features of bank rates are as follows:

  • There is no requirement for collaterals in the bank rate. Therefore, there will be no need to sell and buy securities for banks.
  • The loans taken on bank rates usually are for a longer tenure to meet the goals of commercial banks. Therefore, these can be for a fortnight or even up to 28 days.
  • The RBI is responsible for deciding the mandate of bank rates per the current standing monetary policies. The bank rate is an efficient liquidity adjustment tool for RBI to control economic fluctuations. The change in bank rates will eventually determine the changes in lending rates.
  • The bank rate will impact the banks' overall interest rate. Commercial banks will charge a higher interest rate from the customers when the bank rate is high.

Impact

One of the major impacts of the bank rate is that any changes in it will affect the lending rate. When the bank rates are high, the banks will work on controlling the money flow. This, in turn, decreases the inflation rate.

On the other hand, when the bank rate is low, it improves the market's liquidity. This encourages the customers to borrow loans, which are now available at a lower interest rate. The decrease in bank rate also helps boost the economy's investment and expansion. However, a lower bank rate can also lead to an increase in the inflation rate.

Key Differences Between Repo Rate vs. Bank Rate

Before knowing the difference between repo rate and bank rate, there is one striking similarity between them. In India, both the repo rate and bank rate are determined by the RBI.

Here are some of the key differences between the repo rate vs the bank rate listed below:

Collateral

Under repo rate loans, the bank may be required to submit additional papers, such as bond papers and government securities, to the commercial bank. On the other hand, when banks borrow under the bank rate, they may not need to submit additional documents.

Tenure

Repo rate caters to short-term financial needs, whereas bank rate caters to long-term needs. Thus, the loans taken as per repo rates generally have a timeframe of one day. On the other hand, the loans taken at bank rates can go up to 28 days.

Objective

One of the prime differences between the repo rate and the bank rate is the objective. The bank rate usually serves long-term needs and demands of banks. The repo rate, however, helps manage the liquidity rate as an efficient monetary mechanism.

Interest Rate

The bank rate for commercial banks is higher than the repo rate. The bank rate is higher because it does not require any collateral and is available for a longer term.

Customer Impact

An increase in the repo rate is usually handled by the banks. In case of any sudden growth, the customers will not be affected. On the other hand, any increase in the bank rate will discourage the customers from taking loans from the bank. This is because the bank rate increases and affects the lending rate.

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What is the Current Repo Rate and Bank Rate?

The current repo rate and bank rate are as follows:

  • Repo rate: 6.50%
  • Bank rate: 5.15%

Conclusion

It is important to be familiar with the key differences between the repo and bank rates to understand the best time for investment. This can play an important role in boosting real estate investments. Knowing the bank rates can be helpful if you're planning to buy flats in Mumbai. This will help you understand whether you can take out a loan at a particular time. You can choose from various properties in Mumbai and streamline your investments by understanding these banking rates.

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