Bank Rate vs. Repo Rate: Everything You Should Know
What distinguishes the bank rate from the repo rate of the RBI? We describe the variations and parallels between the two. Home purchasers may frequently hear how the Reserve Bank of India’s (RBI) reduction in the repo rate will probably affect the interest rates on home loans. When the banking regulator lowers the bank rate, they can also hear similar things being said. They might start to mix up the two phrases, bank rate & repo rate, as a result.
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Repo rate versus bank rate
The RBI charges scheduled banks in India two different sorts of interest rates when it lends money to them: the repo rate and the bank rate. The banking regulator in India has the authority to lend money to banks with or without the use of pledged assets as security. The bank rate as well as the repo rate are different due to this very point. (Read our article on the RBI’s repo rate.) The RBI routinely modifies the repo rate and bank rate, which are short-term lending rates, to maintain credit flow in the market.
What is bank rate & explaining bank rate?
When the borrower bank does not offer any form of security for the loan, the RBI will levy an interest rate known as the “bank rate.” Banks may borrow money from the RBI at the bank rate, also referred to as the discount rate, without having to post any security or collateral. As a result, they are exempt from having to enter into a buyback agreement with the apex bank. The RBI currently charges banks 4.25% bank rate when they lend money.
What is Repo rate & explaining bank rate?
Repo is the interest rate that the RBI assesses to banks for loans secured by securities. The RBI and the borrowing bank sign a buyback agreement since a security is involved. In this repurchase agreement, the bank makes a commitment to repurchase the securities or bonds provided by the borrower as collateral at a certain price and on a specified date.
Repo rate vs. bank rate: Key distinction
| Parameter | Bank rate | Repo rate |
| Objective | A bank rate focuses on the long-term financial objectives of a bank. | In order to meet the short-term financial needs of financial institutions, the RBI offers short-term loans at the repo rate. |
| Other names | Discount rate is another name for bank rate. | Repurchase option is referred to as a repo rate. |
| Rate | Typically, bank rate is greater than repo rate. | Typically, the repo rate is less than the bank rate. |
| Impact | When bank rates are high, system liquidity declines. Reduced bank rates are intended to promote borrowing. | Reduced repo rates result in reduced interest rates being given to borrowers. The exact converse is also true; a rise in the repo rate will make borrowing more expensive for the borrower. |
| Tenure | Fortnightly loans or overnight loans may be issued at the bank rate. | Repo rates only last for one day. |
| Security | Bank is not required to offer any form of collateral for the loan. | The bank is required to offer a security for the loan. |
| Policy tools | The RBI’s twice-monthly monetary policy meeting is when the decision to adjust the bank rate is made. | The RBI makes a decision regarding the repo rate change during its bimonthly monetary policy meeting. |
| Agreement | There is no need to sign a repurchase agreement because there is no need for collateral. | A buyback agreement must be signed by the bank and the RBI. |
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