Difference between Bank Rate and Repo Rate

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Bank Rate and Repo Rate are the most common words in the Banking and finance Sector.Bank Rate and Repo Rate are the elements of the monetary policy rates which are defined by the central Bank of the country to control the lending rates by banks, inflation and money supply in the country. The Central bank of the country is an apex institution which is authorized to change and monitor the rates of Bank Rate and Repo Rate.

BANK RATE

Bank Rate is defined as the rate at which the Central Bank or In India, Reserve Bank Of India (RBI) lends money for long-term purposes to the banks in the country. Banks borrow money from the Central Bank for lower interest and lend that money to their customers to gain more profits. Bank Rate focuses primely on interest rates of long-term loans.

If Central Bank increases the Bank Rate banks also increase the interest rates on long-term loans for customers. If central bank decreases the Bank Rate banks also decrease the interest rates related to long term loans for customers.

REPO RATE

Repo Rate is the short form of the term “Repurchase Rate”. Repo Rate is the rate at which the Central Bank or In India, Reserve Bank Of India (RBI) lends money for short-term purposes to the banks in the country. When the banks in the country face a shortage of funds for their needs they borrow money from the central bank for certain rate of interest called “Repo Rate”.

Repo Rate acts as a tool to decide the liquidity rate in the banking system, flow of currency in the economy and control of inflation. Central Bank also uses “Reverse Repo Rate” which is exactly opposite to Repo Rate.

Know more about Reverse Repo Rate here- Difference between Repo Rate and Reverse Repo Rate

Central Bank controls the liquidity rate in the banking system with the help of Repo Rate. Central Bank decreases Repo Rate if it wants to increase the money flow in the country thereby encouraging the banks to borrow more from the Central Bank. It increases the Repo Rate if it wants to decrease the money flow in the country thereby discouraging the banks to borrow money from Central Bank.

COMPARISON TABLE

BANK RATE REPO RATE
Bank Rate is the rate at which the central bank lends money for long-term purposes to the banks in the country. Repo Rate is the rate at which the central bank lends money for short-term purposes to the banks in the country.
Rate of Interest
The Bank rate is usually higher than the Repo Rate. The Repo rate usually stays lower than the Bank Rate.
Impact
The increase in Bank Rate leads to increase in long-term loan interest rates which negatively impact banks and customers also. Increase in Repo Rate negatively impact banks, because they have to pay high-interest rates to the central bank.
Action
Bank Rate acts as a tool to decide the long-term loan lending rates in the country. Repo Rate acts as a monetary tool to decide the liquidity rate in the banking system and control of inflation.
Security
Bank Rate involves no collateral security for borrowing money from the central banks by the banks. Repo Rate involves collateral securities by banks to central bank with an agreement to repurchase the securities by paying a prescribed interest after a certain period of time.
Charged On
Bank rate is the interest rate which is charged on the amount which is lent by the central bank to the commercial bank. Repo rate is the interest rate which is charged on Repurchase agreement.

CONCLUSION

Bank Rate and Repo Rate are the rates of interest which apex bank of the country defines for lending money to the banks present in the country. Bank Rate and Repo Rate are the two important monetary policy rates which are used by the central bank in every country to control and regulate the inflation, interest rates and money supply in the economy. Normally banks don’t borrow money from the┬ácentral bank at “Bank Rate”. They resort to central bank only if there is a severe shortage of funds.
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