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Bank rate and repo rate are two of the most crucial rates that have a major impact on credit activities in India. They play a significant role in determining the interest rates of your home loan, personal loan, business loan, and so on. However, the two rates are often confused with one another and used interchangeably.
Even though they share certain similarities, there are some stark differences that make them stand apart. But before we dive deep into these distinctions, let us first understand what a repo rate and a bank rate is.
When in need of urgent cash, due to a shortage of funds or emergencies, commercial banks borrow money from RBI by selling their securities. A repo rate is the interest charged on the repurchase of these securities. This rate has a direct impact on the cost of borrowing for banks. The repo rate is a useful tool in Indian financial regulation and has the ability to help control the country's monetary base, inflation expectations, and leverage ratio. The current repo rate stands at 6.25%.
A bank rate is the interest rate at which commercial banks borrow money from RBI without selling their securities. This rate has a direct impact on the lending rates of commercial banks. To reduce liquidity in the financial system of the country, the central bank may raise the bank rate, and vice versa. The bank rate plays a vital role in controlling the cash flow in the country. This rate is usually higher than the repo rate. The bank rate in India presently stands at 6.50%.
Here are a few similarities between the repo rate and the bank rate you should know:
RBI determines the repo rate and the bank rate
RBI lends money to banks after considering these rates
These rates regulate the economy by controlling the inflation rate and cash flow
Refer the following table
| - | Repo Rate | Bank Rate |
|---|---|---|
Concept |
Charged on the repurchase of securities that are sold to RBI by commercial banks. |
Charged on loans provided by RBI to commercial banks. |
Interest Rate |
Lower than the bank rate. At present, the repo rate stands at 6.25%. |
Higher than the repo rate. At present, the bank rate stands at 6.50%. |
Effect |
Typically, it does not have a direct effect on the common man and is limited to banks. |
Typically, it has a direct impact on the lending rates offered to the common man. |
Purpose |
Acts as a tool to determine the liquidity rate in the finance sector and curb inflation. |
Acts as a tool to determine long-term loan lending rates. |
Collateral |
Generally, collaterals like agreements, bonds, securities etc. are involved. |
Generally, no collateral is involved. |
Use Case |
Usually, it caters to a bank’s short-term financial requirements. |
Usually, it caters to a bank’s long-term financial requirements. |
Repurchase Agreement |
A repurchase agreement is involved. |
No repurchase agreement is involved. |
While both these rates play a crucial role in managing the overall economy of the country, you may wonder how they impact your personal finances. Let us understand this in further detail:
A bank rate hike has a direct impact on the consumer. This is because an increase in bank rate means that the commercial bank has to pay higher interest to RBI for the amount borrowed. To compensate for this, they raise the interest rates of loans which are offered to customers. This helps commercial banks generate more revenue and reduce financial strain.
Unlike bank rates, the repo rate has an indirect effect on your finances. It plays a role in the revisions made to your fixed deposit and loan interest rates. A change in the repo rate usually affects the Marginal Cost of Funds based Lending Rate (MCLR).
The MCLR is the threshold limit beyond which the interest rate of your loan cannot be lowered. Hence, even if your CIBIL score is great and you meet all the eligibility criteria, you won’t be offered an interest rate lower than a set percent.
A reverse repo rate is the interest rate at which RBI borrows money from commercial banks. The current reverse repo rate stands at 3.35%. This mechanism is usually implemented when the liquidity in the financial system is too high.
No, they are not. Bank rate is the interest charged by RBI on loans provided to commercial banks. Meanwhile, a bank interest rate is charged by a financial institution on a loan taken by a consumer.
Liquidity crunch or surplus lead to revisions in the repo rates. The impact of geo-political conditions, inflation rates, and other factors that affect the economy are curbed by making revisions to the repo rate.
At present, the repo rate stands at 6.25%, while the bank rate stands at 6.50%.
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