Both these rates are tools used by the Reserve bank of India to control the money supply in the market. Bank rate and repo rate are the lending rates of the RBI to lend money to the commercial banks. Both are two different but commonly used rates by the central bank of a country while lending and borrowing to the commercial and all other types of banks.
Bank rate
- A bank rate is also known as the "Discount rate" at which commercial banks and many other financial banks will get a loan and advances from the central bank of a country.
- A bank rate is a regular rate at which RBI buys or rediscounts bill of exchange and commercial paper which are acceptable under the purchase act.
- A bank rate helps to control the liquidity in the economy when in the economy there is an excess of a money supply at that time a central bank increases the bank rate it directly increases the borrowing cost for the banks and the credit supply of the money goes down in the economy, and vice a versa. So, a bank rate has a direct impact on the economy of a country.
- In a simple language when the bank rate increases, the money supply goes down and when bank rate decreases the money supply increases in the economy.
- A bank rate will affect the bank investments like bank deposits, bond issues, and mortgages.
Repo rate
- The full form of repo rate is "Repurchase option" and also known as "repurchase rate" and is a short-term borrowing tool.
- A repo rate is the rate which is used by the commercial banks and financial institutions to borrow money from the central bank of a country.
- A repo rate is used like a repurchase agreement in a banking transaction and the securities which buy by the central banks are for a particular period and at a pre-defined price and it acts as collateral
- When an economy finds a shortage of liquidity and the rate of interest is rising, a central bank of a country purchases government securities from the banks and pays for it. By doing this, it will help to improve the liquidity and expand the credit. This process is also called as a repurchase action and the rate at which it purchases securities is called repo rate.
- When the repo rate is lower, it will increase the monetary system of an economy and as a result, the banks will get money at a lower rate and on the opposite side when the repo rate is higher in an economy, it will reduce the money supply which leads to reduction in the borrowing of funds.
Differences between bank rate and repo rate
Meaning
- Bank Rate is the rate which is charged by the Central bank of a country on the loans and advanced to commercial banks and many other financial institutions.
- A repo rate is the rate which is used by the commercial banks and financial institutions to borrow money from the central bank of a country against securities as collateral.
Repurchase agreement
- In bank rate, there is no repurchase agreement at all.
- In repo rate, there is a repurchase agreement ban the commercial banks to the central bank of a country.
Deals with
- A bank rate deals with loans and advances.
- A repo rate deals with securities.
Time period
- A bank rate is a long-term financial need.
- A repo rate is a short-term financial requirement.
Collateral
- In bank rate, there is no collateral involved.
- In repo rate, collateral involved as a securities.
Effect on customer
- A bank rate has a direct effect on the customers.
- A repo rate doesn't affect directly to the customers because usually, banks will handle it.
Which is higher?
- A bank rate is higher than the repo rate.
- A repo rate is lower than the bank rate.
