Difference Between Bank Rate and Repo Rate

Repo Rate vs Bank Rate

Know the Difference Between Bank Rate and Repo Rate

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Repo rate and Bank rate both have their own features and benefits. The Repo rate and Bank rate, both are monitored by the Reserve Bank of India (RBI). The RBI cut the Repo rate by 75 basis points on March 27, 2020, due to which the Repo rate was reduced from 5.15% to 4.40%. As of December 2020, the current Repo rate is 4%. On the other hand, the Bank rate is currently 4.25%. Both rates are short-term tools for controlling cash flow in the market. The increase or decrease in these rates causes a similar change in housing loan interest rates and that of other kinds of borrowing options as well.

To understand both terms better, we need to do a Repo rate vs Bank rate comparison in a descriptive way. 

Differences Between Repo Rate and Bank Rate

Repo rate and bank rates are two of the most common terms used in the macro-lending space. While the meaning of both the terms is very similar, there is a subtle difference between bank rate and repo rate. Repo rate is the rate of interest at which the RBI lends money to commercial banks by purchasing securities, while bank rate is the interest rate at which commercial banks borrow from the RBI without selling any securities.

Key Differences Between Repo Rate vs Bank Rate

Regardless of the fact that both aspects are used for the same purpose and are regulated by the RBI, they have a few distinctive elements that set them aside from each other. Let's take a closer look at the Repo rate vs Bank rate. 

  • The Repo rate is used to buy back investments sold by financial institutions to the Central Bank, whereas the Bank rate is used to move financial firms forward with the Central Bank.

  • While obtaining money on the Repo rate, borrowers are asked to submit securities, bonds, agreements, and so on. On the other hand, the Bank rate is free from all these. Borrowers can get money without giving any collateral. 

  • Repo rate fulfils short-term financial requirements of commercial banks, whereas Bank rate meets long-term working capital needs of commercial banks.

  • Growth in Repo rate is typically handled by banks and has no direct impact on customers, whereas any rise in Bank rate directly affects the funding costs provided to clients.

Now that we know about the differences between Repo rate vs Bank rate, let’s talk about both terms in a thorough manner. 

What is Repo Rate

The Repo rate is the interest rate at which the nation’s central bank RBI, gives money to financial institutions in the event of a funding shortage. It is one of the significant tools that RBI uses to keep inflation in control. The Repo rate is a useful weapon in Indian financial regulation, with the ability to control the country's monetary base, inflation expectations, and leverage ratio. Furthermore, Repo levels have a direct impact on the cost of borrowing for banks. The greater the Repo rate, the greater the cost of borrowing for banks, and vice versa. 

What is Bank Rate

The Bank rate, also known as the discount rate, is the interest rate charged by the central bank on funds lent to commercial banks. Commercial banks' borrowing rates are affected by Bank rates. An increase in Bank rates will mean greater borrowing rates by banks. To reduce liquidity, the central bank may raise the Bank rate, and vice versa. Bank rates are generally greater than Repo rates because they are a vital system for controlling cash flow.

What is Recent in Repo Rate and Bank Rate

The RBI adjusts the Repo rate and the Bank rate in response to changing economic indicators. When the RBI changes interest rates, it affects all parts of the economy in different ways. The current Repo rate is 4%, whereas the current Bank rate is 4.25%. 

Here is a list of changed Repo rates over the last few years.

4th December 2020

4%

22nd May 2020

4%

27th March 2020

4.40%

4th October 2019

5.15%

7th August 2019

5.40%

6th June 2019

5.75%

4th April 2019

6%

7th February 2019

6.25%

Conclusion

The Reserve Bank of India, being the apex banking institution in the country, has at its disposal tools to regulate the flow of money and inflation in the economy. Of these, two such are the Repo rate and the Bank rate.Based on the economic need of the hour, the RBI changes these rates, moderating commercial banks’ borrowing capacity. Whenever there is a change in both the bank rate and repo rate, it results in a corresponding change in the rates applicable on Home Loans. Higher these rates, higher the rate on Home Loans, and vice versa. You can avail housing loans at lucrative rates of interest offered by our partners on the  Bajaj Markets portal.

FAQs on Repo Rate vs Bank Rate

  • ✔️Is the Bank Rate decided by the RBI?

    Yes, the RBI sets the Bank rate in accordance with the country's fiscal policy.

  • ✔️Is collateral required for the Bank Rate?

    No, the RBI doesn’t ask for any security or collateral while obtaining funds at the Bank rate.

  • ✔️What is the latest Repo Rate?

    The current Repo rate is 4%.