Bank Rate Vs Repo Rate: 7 Key Differences

The bank rate and the repo rate are two mechanisms used to control an economy’s liquidity and inflation. When comparing bank rates and repo rates, the most important distinction is the duration of the commercial banks’ borrowings from the central bank. Banks mostly employ the bank rate to meet their long-term financial goals and needs, whereas the repo rate is used when dealing with short-term loans.

What is Bank Rate?

The bank rate is defined as the interest rate at which the central banks provide loans to commercial banks and other financial institutions. This rate is applied to the long-term lending of loans. In India, it is done by the India’s Reserve Bank (RBI). It doesn’t include discounting/rediscounting of bills of exchange. 

Commercial banks, the Government of India, state governments, financial institutions, cooperative banks, and NBFCs are among the institutions that use this facility to borrow. The bank rate has a direct impact on the long-term lending activities of lending institutions, such as commercial banks.

A central bank rate drop is viewed as a symbolic step to promote market liquidity. Borrowings become less expensive as the bank rate falls. It also encourages credit card purchases. It promotes the flow of funds and boosts economic activity. When a central bank seeks to limit market liquidity (the availability of money), it boosts the bank rate.

The bank rate was synchronized with the MSF (Marginal Standing Facility).

What is Repo Rate?

The repo rate is the interest rate at which banks can borrow money from the central bank in exchange for selling their securities to the central bank. The Reserve Bank of India charges the repo rate on its short-term lending (typically when there is a liquidity constraint), unlike the bank rate. The repo rate is also known as the discount rate in western economies. The reverse repo rate, on the other hand, is the rate at which commercial banks deposit excess cash or additional money with the central bank. Repurchasing Option is what Repo stands for.

A repo rate is a sort of discount on dated government securities in technical terminology. Commercial banks and other financial institutions surrender or deposit these government securities in order to get short-term loans. When banks request that the central bank return their securities, the value of the dated securities is reduced by an amount equal to the current repo rate.

Banks utilize the repo rate for overnight borrowings, and the interbank market is also dependent on it. The Call Money Market of India is the name given to the interbank market. The repo rate has a direct impact on the banks’ lending products in addition to affecting their operational costs. The interest rate on loans offered by banks to their customers is reduced when the RBI lowers the repo rate.

The repo rate is a key measure of central banks’ monetary policy stance around the world.

RBI has begun offering long-term repo operations in order to ensure more liquidity in the market and encourage commercial banks to lend more.

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Bank Rate vs Repo Rate

Bank rates are always higher than repo rates. When comparing the bank rate and the repo rate, we must consider the two rates’ primary goals. Collaterals such as securities, bonds, and agreements are used when a commercial bank borrows money from the central bank through a repo rate facility. Long-term borrowings by commercial banks and other financial institutions from the central bank under the bank rate facility, on the other hand, do not require any collateral (security).

Differences between Bank Rate and Repo Rate

The duration of the bank rate initiative borrowings is longer than a month because they are available as long-term loans. Loans with a repo rate, on the other hand, are intended to be paid back overnight, and their term is often one day.

The involvement of the repurchasing agreement is one significant difference between the bank rate and the repo rate. While repurchasing agreements (of securities, etc.) between banks and the central bank are an possibility in repo rate loans, no such repurchasing is available in bank rate loans.

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Bank Rate vs Repo Rate: 7 Key Differences in Points

Whilst the central bank sets both the bank rate and the repo rate, there are some significant distinctions between the two. These are seven key distinctions between the bank rate and the repo rate:

  1. The repo rate is the interest rate that the central bank charges commercial banks when they repurchase securities from the central bank. The loan is issued to the banks at a set rate in bank rate.
  2. Bank rates are always higher than the repo rate set by central banks.
  3. The goal of the bank rate and the repo rate is another distinction. Borrowings at the bank rate are good for long-term financial aims, whilst those at the repo rate are for the banks’ short-term financial demands.
  4. Borrowings at the bank rate do not require collateral. Central banks use collateral such as gold, securities, bonds, and agreements to provide loans under the repo rate agreement.
  5. Bank rates have a direct impact on the public/customer borrowing rates offered by scheduled commercial banks. Customers are usually unaffected by repo rates.
  6. The repo rate is used to control inflation and regulate liquidity in an economy, whereas the bank rate effects long-term lending rates.
  7. The duration of bank rate loans is one month, while repo rate loans are one day.

Final Thoughts

The central bank uses bank rates and repo rates to control the money supply in the economy. The monetary policies of a central bank determine an economy’s macroeconomic stability. Bank rates and repo rates are two examples of instruments that influence an economy’s macroeconomic outlook.

In order to acquire an understanding of a country’s economic stability, it is necessary to comprehend the bank rate versus repo rate differences criterion. The bank rate has become dormant among monetary management instruments, and banks rarely borrow cash through this facility. In practically all market economies, the repo rate has emerged as the primary tool for monetary policy.

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Frequently Asked Questions

Who decides the bank rate?

The central bank of a country determines the bank rate. The RBI makes the decision in India.

What is the difference between bank rate and repo rate?

The bank rate is the long-term interest rate at which commercial banks borrow money from the central bank. The repo rate is the interest rate charged by banks when they deposit government assets and bonds in order to get short-term loans.

Who decides the repo rate?

The RBI determines the Repo rate.

What is the timeframe for bank rate and repo rate?

For long-term borrowings of one month or more, the bank rate is applied. The repo rate is an overnight lending facility with a one-day term.

What is the reverse repo rate?

The rate at which the central bank borrows money from commercial banks is known as the Reverse Repo rate.

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