The repo rate and bank rate are two different types of interest rates that the RBI charges from scheduled banks in India, to lend funds to them. India’s banking regulator can grant loans to banks, with or without the pledging of securities and collateral. This very fact creates a difference between the bank rate and the repo rate.
Bank rate and repo rate are short-term lending rates and are periodically changed by the RBI, to maintain credit flow in the market.
What is the bank rate?
The bank rate is the interest rate that RBI charges when the borrower bank does not provide any security against the loan. Also known as the discount rate, the bank rate allows banks to borrow from the RBI without having to provide any collateral or securities. This means they do not have to sign any repurchase agreement with the apex bank. At present, the RBI charges a 4.25% bank rate from banks on lending funds.
What is the repo rate?
Repo is the interest rate that the RBI charges from banks, on loans against which they provide security. Since there is security involved, the RBI and the borrower bank sign a repurchase agreement. In this repurchase agreement, the bank promises to repurchase the securities or bonds they provide as collateral on a certain date, at a predetermined price.
At present, the RBI charges a 4% repo rate from banks on lending funds.
Bank rate vs repo rate: Main difference
| Parameter | Bank rate | Repo rate |
| Rate | The bank rate is usually higher than the repo rate. | The Repo rate is usually lower than the bank rate. |
| Security | The bank is not liable to provide any security against the loan. | The bank is liable to provide security against the loan |
| Agreement | No requirement to sign a repurchase agreement, as there is no collateral involved. | The RBI and the bank have to sign a repurchase agreement. |
| Objective | A bank rate focuses on a bank’s long-term financial goals. | This means RBI provides short-term loans at a repo rate, to cater to the short-term financial requirements of financial institutions. |
| Impact | In case of high bank rates, liquidity in the system contracts. Lower bank rates are meant to encourage borrowing. | A cut in repo rate means borrowers will be offered loans at lower rates. The opposite is also true – a hike in the repo rate will increase the cost of borrowing for the borrower. |
| Other names | The bank rate is also known as the discount rate. | Repo rate refers to the repurchase option. |
| Tenure | Bank rates can be offered for overnight loans or fortnights. | Repo rate has a short tenure of a day. |
| Policy tools | Decision on bank rate change is taken during the RBI’s bi-monthly monetary policy. | Decision on repo rate change is taken during the RBI’s bi-monthly monetary policy. |
Source:-https://housing.com/news/bank-rate-vs-repo-rate/
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