What do you do when you’re in a financial crunch? You would probably approach a bank or a financial institution and borrow funds to meet your requirements. Similarly, a bank also borrows funds from the Reserve Bank of India (RBI) when it is short of funds. The type of interest charged by the RBI varies depending on the nature of the borrowing.
The bank can either borrow funds at the repo rate. Many individuals tend to assume bank rate and repo rate are the same. Where, the two rates are not the same. In fact, there are plenty of differences between the repo rate and the bank rate. In this article, we’re going to take an in-depth look at what both of these rates are, including a comparison of bank rate vs. repo rate.
What is the Repo Rate?
The repo rate, also known as the repurchase rate, is the interest rate at which a central bank like the RBI lends money to banks and financial institutions against a collateral. The collateral is usually in the form of government bonds, which are sold to the RBI and then repurchased later.
Here’s a hypothetical example of how a repo rate transaction works.
A commercial bank or financial institution in need of funds approaches the RBI for a repo rate loan. In exchange, the borrowing bank or financial institution enters into a repurchase agreement with the central bank.
As per the agreement, the bank is required to sell securities like government bonds to the RBI and repurchase them (at a higher rate) on a future date. The difference between the selling price and the repurchase price is the interest component of the loan and would be equivalent to the prevailing repo rate at the time of availing the loan.
What is the Bank Rate?
Before moving on to the comparison of bank rate vs. repo rate, let’s quickly take a look at what the bank rate is.
The bank rate is the interest rate at which the RBI lends money to financial institutions and commercial banks without the need for collateral. Since there’s no repurchase agreement between the borrowing bank and the RBI, the bank rate is often higher than the repo rate. Additionally, the loans offered at the bank rate are often for tenures longer than repo rate loans.
The bank rate is directly responsible for the rate of interest on loans offered to individuals and businesses. Banks and financial institutions often borrow funds from the Reserve Bank of India at repo rates and lend them to their customers at a bank interest rate.
Differences Between Repo Rate and Bank Rate
Now that you’re aware of these two rates, let’s look at the difference between repo and bank rates.
| Particulars | Bank Rate | Repo Rate |
| Meaning | The rate at which the central bank lends money to individuals, commercial banks and financial institutions with or without collateral | The rate at which commercial banks can borrow money from the central bank by selling securities with an agreement to repurchase them in the future |
| Purpose | Used to influence the overall interest rate level in the economy and control inflation | Used to provide short-term liquidity to commercial banks and regulate the money supply |
| Monetary Policy Tool | Indirectly affects the money supply | Directly affects the money supply |
| Liquidity Management | Not primarily used for short-term liquidity management | Specifically designed for short-term liquidity management and helps banks meet their immediate funding needs |
What are the Current Repo Rates And Bank Rates in 2023?
Now that you’ve seen a comparison of the bank rate vs. the repo rate, let’s look at what the rates for the financial year 2023 – 2024 are.
The Reserve Bank of India’s Monetary Policy Committee (MPC) is responsible for assessing, setting and revising the interest rates in the economy once every quarter. As of November 2023, both the repo rate and bank rate were left unchanged at 6.50% and 6.75% respectively. This decision was taken at the MPC meeting conducted between October 04 to October 06, 2023.
Conclusion
With this, you must now be aware of the differences between the repo rate and bank rate, along with how important both of these two rates are in the economy. The Reserve Bank of India consistently monitors the health of the economy and makes adjustments to these rates if it senses the need. As an investor, you need to keep an eye out for changes in these rates, especially the bank rate, since it can directly affect you.
FAQs
Does the bank rate or the repo rate influence interest rates on loans offered to individuals?
Yes. The prevailing bank rate may influence the rate at which banks offer loans to their customers. For instance, banks may increase the interest rate on loans if the bank rate rises. On the other hand, they may also reduce loan interest rates if the bank rate is reduced.
Why are the bank rates and the repo rates revised?
The Reserve Bank of India periodically assesses and revises the bank and repo rate to control the money supply in the economy and to keep inflation in check. For instance, if there’s high inflation in the economy, the RBI may choose to reduce the supply of money by increasing the rates. On the other hand, if there’s low inflation and a need for economic growth, the RBI may reduce the rates, which would increase the money supply in the economy.
How often are the bank and repo rates revised?
The Reserve Bank of India’s Monetary Policy Committee (MPC) holds a meeting once every quarter. In these meetings, they assess and make revisions to the bank and repo rates based on the changes in economic conditions, inflation and growth.
Can the bank rate and repo rate be the same?
The bank rate and the repo rates cannot be the same. In fact, the bank rate is usually higher than the repo rate because it is levied on unsecured loans offered to banks.
Do the bank and repo rates affect the stock market?
Yes. Changes in the bank and repo rates may influence investor behaviour. For instance, an increase in the rates, especially bank rates, may be viewed negatively since it would mean higher borrowing costs for companies, potentially leading to a sell-off in the markets. On the other hand, a reduction in the rates may lead to positive market sentiment in the short term due to the increased economic activity due to the rate reduction.