RBI recently cut down the repo rate. This announcement was made on 4th October 2019, on which the bank rate was also reduced a bit. The new repo rate is 5.15 percent. This cut will come as a benefit for the people who borrow from banks. This is because when the banks can borrow from RBI at lower rates, they also lend at lower rates.
Commercial & central banks’ borrowings are based on the repo rate and the bank rate. All the lending and borrowing activities take place after the calculation of such rates. These rates are the rates at which RBI, which is the central bank of India, lends money to the commercial banks when they need it.
Both of these rates are usually considered or misunderstood as same because both these tools are used for controlling the cash flow in the economy. But, the truth is that there is a difference between them. Before moving on to the differences, we need to know the meaning of both the terms. Add paragraph text here.
What is Repo Rate in brief?
When the banks do not have enough funds to meet their needs, they go to or approach RBI for some funds similar to us as we ask the banks for loans in such a situation. So, the rate at which RBI lends funds to the commercial banks when they are short on cash is known as the Repo rate.
This is the interest charged by the central bank for lending. Commercial banks sell securities to the central bank to get the funds and promise them to buy them at a certain date in the future.
What is the Bank rate in brief?
Bank rate is the rate at which the central bank gives loans to financial institutions. Here, the banks do not have an agreement of repurchasing at a future date & neither is there any security or collateral. Between the funds that banks borrow from the central bank and the funds that they lend further, they make a profit. They lend at higher rates to make a margin in between for their profits.
Bank rate is usually on the higher side in comparison to the repo rate, as it is more important in controlling liquidity in the market. RBI increases the bank rate sometimes, which puts the burden on banks while borrowing. So, they borrow less now & as a result, the supply reduces in the economy.
Now, let’s have a look at the differences between them.
When the central bank offers some loans to the commercial banks, then it charges the bank rate on them. But, when the commercial banks sell securities to the central bank, the rate charged here is called repo rate.
While charging Bank rate, any collateral, such as securities and bonds, is not required. While in the case of the Repo rate, these securities are required to be provided.
Repo rate is on the lower side always when compared to the Bank rate at the same time.
A hike in the Bank rate indirectly affects the public. This is because when bank rate increases, the lending charges of commercial banks to the customers also increases, thereby reducing the loan demand. It damages the growth of the economy. However, if the repo rate increases, this increase, and its impact is handled by the banks and doesn’t really affect the customers of the banks.
Repo rate’s primary focus is on the short-term financial needs of the commercial banks, whereas the Bank rate somewhat caters to the long-term financial needs of them.
Although the Bank rate & SBI Repo rate has many differences, they are also similar in some ways. Firstly, both of them are decided by the central bank. These two tools are generally used to manage and monitor the cash flow in the economy. These are also used for the introduction of the inflation rate, liquidity rate & money supply.
