The loans are the way by which a person gets investment, and he pays it back on a monthly basis. The loans have made it easy for people to buy houses, cars and get funding for their businesses.
But the loans are paid back with interest, and those interests are calculated on the bank rate or repo rate. The Reserve Bank of India fixes these both.
Key Takeaways
- The bank rate is the interest rate at which a country’s central bank lends money to commercial banks without collateral. In contrast, the repo rate is the rate at which commercial banks borrow from the central bank using government securities as collateral.
- A change in the bank rate influences long-term lending rates, while the repo rate affects short-term borrowing costs.
- Central banks utilize the bank and repo rates to regulate monetary policy, control inflation, and maintain financial stability.
Bank Rate vs Repo Rate
The difference between the bank rate and the repo rate is that the Bank rate is the rate that is charged on money that the Central bank is lending in the commercial bank. In contrast, the Repo rate is the money that the commercial bank is giving back to the Central bank to get back the security they have given in exchange while taking the loan. No security is required in the bank rate, but in the repo rate, security is needed.
The Bank Rate is the money that is asked by the commercial bank from the Central Bank or RBI as per the policies of the country.
The Bank Rate is the money that is lent to a bank in times of crises like a shortage of funds. The Bank rate does not require security in the exchange of money.
The Repo Rate is the rate of interest charged when commercial banks ask for money for a shorter term. The Repo rate requires the security which the bank buys once they return the money along with interest.
The financial institution uses this method to increase its investment. The mutual fund market is also used for money lending when the bank provides security in return to them.
Comparison Table
| Parameters of Comparison | Bank Rate | Repo Rate |
|---|---|---|
| Definition | The Bank rate is the interest applied on the money when the bank buys some funds from the Central bank in the shortage of money. | The Repo rate is used to calculate the rate of interest in the money that is being lent to the bank for the shorter-term period. |
| Other names | The Bank Rate is also known as the discount rate. | The Repo rate is also known as the repurchase agreement. |
| Period | The Bank rates are money that is being lent to the bank for a long-term period. | The Repo rate is given for a short-term period to the banks. |
| Rate of Interest | The bank rate has a high rate of interest as compared to the repo rate. | The Repo rate is less as compared to the Bank rate. |
| Condition | The Bank rate is fixed by the government for every bank. The Bank rate does not require security in exchange for money. | The Repo rate requires security in the exchange of money. |
| Effects | The increase in bank rate also increases the interest rate on the loans given to the customer. | The Repo rate is maintained by the bank and thus, the customers are not affected by the repo rate. |
What is Bank Rate?
The bank rate is the amount of interest charged to the bank when they take money from the Central bank. The bank takes money in times of crisis, and the amount of money being given depends on a country’s monetary policy.
The bank rate does not include security in the exchange.
The bank rate is the rate of interest that the Central bank gives to the commercial bank for the long term. The bank rate is the interest that influences the loan interest of the customers.
The bank rates are high as the money has been provided for the long term. The interest whereas is also fixed by the RBI. In contrast, it may vary from country to country.
The bank rate if increases and the interest in the money also increases, which somewhere influences the money. The market. The increase in the bank rate decreases the supply of money in the market as the interest rates are increased.
Thus, the bank rate influences the money present in the market.
What is Repo Rate?
The Repo rate is the interest rate charged by commercial banks when they buy back securities from the lender.
The Repo rate is the money managed by the bank itself thus, it does not influence the interest rate given to the customers. The Central bank can borrow the money or other means like the stock market.
The Repo Rate is the money being charged on the loans the bank takes for a shorter period. These types of funds are used to increase capital.
The Repo rates require security in exchange for money. The Repo rate is the fund that decides the liquidity funds. The RBI uses them to encourage the banks to sell their securities.
In 2007, there was a repo market where there was a deficiency of the investment banks, and if the investments were available, they charged a high amount of interest.
This led to crises known as the Great Recession. The Great Recession was seen globally, and the countries saw the final crises. The International Monetary Fund declared this time as the greatest decline in finance.
Main Differences Between Bank Rate and Repo Rate
- The bank rate is the rate that affects the interest rate on the loans of the customers, whereas it does not imply the repo rate.
- The repo rate decides the liquidity fund of the bank, whereas the bank rate does not influence it.
- The bank rate is for the long term, whereas the repo rate is for the short-term of the period.
- The Bank rate has a high interest as compared to the repo rate.
- The Bank rate does not require security, whereas the repo rate requires security for the exchange.
- https://onlinelibrary.wiley.com/doi/abs/10.1111/1467-8268.12056
- https://academic.oup.com/qje/article-abstract/42/4/511/1887698
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