The central bank’s interest rate policy includes both the bank rate and repo rate. Both of these rates are used when a country’s central bank and commercial bank conduct transactions.
The Central Bank is the very best economic organization that regulates the banking and economic machine of the country. It is skilled to deliver economic stability, difficult banknotes, and hold the cost of a country’s foreign exchange withinside the global market. It manages the country’s foreign exchange and credit score machine.
To control the supply of currency in the economy, the central bank uses both the repo rate and bank rate. Central banks, on the other hand, utilize the repo rate more frequently than the bank rate.
Despite the fact that both words bank rate and repo rate have the same goal and include the same parties, they are fundamentally different. We need to look at the differences between bank rate and repo rate to better comprehend the meaning, importance, and use of each of these terms.
What is the bank rate?
Banks borrow money from the central bank and lend it to their customers at a higher interest rate, making a profit. Bank Rates are typically higher than Repo Rates because they are an important tool for controlling liquidity.
The “Bank Rate” refers to the interest rate charged by the central bank on loans made to commercial banks and other financial institutions. In this case, no repurchasing agreement was signed, no securities were sold, and no collateral was involved.
What is the repo rate?
During a financial crisis, financial institutions borrow money from the RBI by selling securities or bonds and agreeing to repurchase the securities at a predetermined price on a specific date.
The Repo Rate refers to the interest rate charged by the central bank on cash borrowed by commercial banks.
Difference between Bank rate and Repo rate:
| Bank rate | Repo rate |
|---|---|
| Meaning | |
| Bank rate is the rate at which the central bank lends money to other banks | Repo rate is the rate at which the central bank charges on the repurchase of securities. |
| High / low | |
| Bank rates are generally higher than the repo rate | Repo rate is lower than the bank rate |
| Impact | |
| The final impact is on the final customer of the banks | Here the impact of the rate does not directly impact the public directly. |
| Dealings | |
| This is usually meant for dealing with the loans | Here the repo rate deals with the securities |
| Collateral | |
| No collateral | There is collateral and the securities sells act as the collateral. |
Bottom line:
As a result of the preceding discussion, the difference between bank rate and repo rate is even though the goals and parties are of the same but there is a difference in collateral and dealings and has fundamental differences in the rate and all.
Though the Bank Rate and the Repo Rate differ, both are used by the RBI to control liquidity and inflation in the market. In a nutshell, the central bank employs these two potent tools to introduce and monitor the market’s liquidity rate, inflation rate, and money supply.
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