The central bank uses repo rate and bank rate as a tool to inject or curb liquidity in the banking and monetary system of the economy. The two terms differ in a sense that bank rate is just a lending rate at which central bank lends money to other banks whereas, in the case of repo rate or repurchase transaction, the government buys back securities from domestic banks. Your email address will not be published. Save my name, email, and website in this browser for the next time I comment.
Key Differences Between Bank Rate and Repo Rate The difference between bank rate and repo rate are explained, in the given below points: Bank Rate is the discount rate at which the Central Bank extends a loan to the commercial bank and financial institutions. Repo Rate is described as a rate at which Central Bank extends a short-term loan to the commercial bank. In a bank rate, there is nothing like repurchase agreement; only the money is lent to banks and financial intermediaries at a fixed rate.
Conversely, in Repo Rate, the sale of securities to the central bank, on a repurchase agreement, i. The bank rate is charged on the loan extended to the commercial bank by the apex bank. As opposed to Repo Rate, is the rate of interest, charged on the repurchase of securities. In general, bank rate caters long term fund requirement of the commercial banks whereas the repo rate focuses on providing short-term finance to banks.
Thus, it aims at controlling the economy by keeping inflation in the limit. Short-Term Borrowing — RBI lends money for a short period of time, maximum being an overnight post which the banks buy back their securities deposited at a predetermined price. Cash Reserve or Liquidity — Banks borrow money from RBI to maintain liquidity or cash reserve as a precautionary measure. Additionally, the levels of repo have a direct impact on the cost of borrowing for banks.
Higher the repo rate, higher will be the cost of borrowing for banks and vice-versa. During high levels of inflation, RBI makes strong attempts to bring down the flow of money in the economy. One way to do this is by increasing the repo rate. This makes borrowing a costly affair for businesses and industries, which in turn slows down investment and money supply in the market.
As a result, it negatively impacts the growth of the economy, which helps in controlling inflation. On the other hand, when the RBI needs to pump funds into the system, it lowers the repo rate. Consequently, businesses and industries find it cheaper to borrow money for different investment purposes. It also increases the overall supply of money in the economy.
This ultimately boosts the growth rate of the economy. Reverse Repo Rate is a mechanism to absorb the liquidity in the market, thus restricting the borrowing power of investors. Reverse Repo Rate is when the RBI borrows money from banks when there is excess liquidity in the market.
The banks benefit out of it by receiving interest for their holdings with the central bank. During high levels of inflation in the economy, the RBI increases the reverse repo. Collateral: One of the major bank rate and repo rate differences is that the bank rate never involves any form of collateral, while the repo rate always involves collateral like securities, bonds or agreements.
But the repo rate affects banks and other business organizations. But in the case of repo rates, loans are usually overnight and dealt with within one day. Repurchasing Effects Due to the Difference Between Repo and Bank Rate: Based on the general definition, we can conclude that no repurchase agreements are involved with bank rates.
However, the concept of repo rates itself is based on a repurchase agreement. Whereas repo rates help maintain a balance in the liquidity in our nation. For maintaining the currency supply in the nation, the central bank borrows money from other banking institutions. Thus, other commercial banks can avail benefits and earn interest as profit while their money is safely stored with the central bank. The reverse repo rate is the interest that RBI pays to other commercial banks for borrowing their funds.
When the cash flow in the market increases, the reverse repo rate is also increased. It motivates other banks to store their money with RBI, thus ultimately reducing the chances of more loans to citizens or business organizations.
This helps reduce the currency flow and maintain a balance in the economy. The common difference between the reverse repo rate and repo rate is repurchasing agreement. While the repo rate is decided for the repurchase of collateral, there is no such agreement in the case of the reverse repo rate. Also, the reverse repo rate is usually lesser than the repo rate. In every country, an apex banking institution has power over other commercialand domestic banking institutions.
This central bank is responsible for keeping a balance in the economy and maintaining liquidity. But when the loan is given on securities, the commercial banks promise to purchase their collateral at a predetermined time. The rate at which the collateral is purchased back from the RBI is termed the repo rate. If you are looking to deep dive into the topic or get some financial advice, contact the experts from NoBroker.
They will clear all your doubts and guide you at each step at just a minimal cost. Answer: When the bank rate is high, fewer commercial banks can borrow loans from the central bank.
Which ultimately leads to a cash crunch, and the economy slows down. It increases investment and expenditure, thus boosting the economy. The rate at which commercial banks can repurchase their collateral from the central bank is termed the repo rate. As decided on 4th, 5th and 6th August , the current repo rate was locked to remain unchanged. Answer: The current bank rate in India is 4. A significant change in bank rates was witnessed on May 22, It was reduced from 4. Answer: When the liquidity in the market increases, RBI borrows money from commercial banks.
This way, other banks can earn interest as their money is stored with the central bank. The rate at which RBI borrows loans is termed the reverse repo rate. Thanks For Subscribing!
0コメント