Bank Rate vs Repo Rate

What Is The Repo Rate?

Repo Rate is the overall rate at which the country’s central bank gives money to other commercial banks or financial institutes during any monetary emergencies. Whenever a commercial bank experiences a financial crisis, they approach the central bank for loans. That's where the repo rate comes into being. 
In simpler words, commercial banks borrow money from the reserve bank through a few methods. Either they sell bonds or securities with a specified agreement to rebuy securities on the mentioned date at a different price point. The interest that the central bank charges on the borrowed cash is the repo rate.
On the other hand, if a commercial bank has excessive funds, they deposit them to the central bank. That's how they can earn the interest for Reverse Repo Rate.
 

Impact of Repo Rate

The repo rate has a direct impact on borrowing costs, liquidity and overall economic activity in India. When the Reserve Bank of India (RBI) increases the repo rate, borrowing becomes more expensive for commercial banks. As a result, banks often raise interest rates on loans such as home loans, car loans and personal loans. This can reduce consumer spending and business investment.

On the other hand, when the RBI reduces the repo rate, banks can borrow funds at a lower cost. This usually leads to lower lending rates for customers, encouraging borrowing and spending. Lower repo rates can stimulate economic growth and improve liquidity in the market.

The repo rate also influences inflation. Higher repo rates help control inflation by reducing the money supply in the economy, while lower repo rates can increase liquidity and demand.

How Repo Rate is Determined

The repo rate is determined by the RBI’s Monetary Policy Committee (MPC). The committee reviews economic conditions during its policy meetings and decides whether the rate should be increased, decreased or kept unchanged.

Several factors are considered before deciding the repo rate, including:

• Inflation levels
• Economic growth
• Liquidity in the banking system
• Global economic conditions
• Currency stability
• Consumer demand and spending patterns

If inflation rises sharply, the RBI may increase the repo rate to reduce excess liquidity and stabilise prices. Conversely, during periods of slow economic growth, the RBI may lower the repo rate to encourage borrowing and investment.

What Is The Bank Rate?

The bank rate is an interest rate at which the country's central bank lends money to the domestic banks. They are often short-term loans and usually do not include any repurchasing agreement, securities, or collateral. 
The central bank lends funds to the banks and money to the customers at a high rate of interest. That's how the profit is made. Simply put, comparing it to the repo rate, a bank rate is usually higher and is a more significant toll that controls liquidity. It is often defined as the discount rate.
This rate is charged by the nation’s central bank on any loan granted to the commercial bank. On the other hand, an overnight rate happens to be the interest that a bank charges while borrowing funds. With the increase in the bank rate, borrowing costs will increase, and the supply of money will reduce.
In simple words, the bank rate is the overall interest rate at which domestic banks can borrow money from the country's central bank. Note that managing the bank rate is the method by which the central banks may affect financial movements.
 

Impact of Bank Rate

The bank rate is the rate at which the RBI lends money to commercial banks without collateral for long-term purposes. Changes in the bank rate affect the long-term borrowing costs of banks and influence overall interest rates in the economy.

When the bank rate increases:

• Borrowing becomes costlier for banks
• Loan interest rates may rise
• Businesses and consumers may borrow less
• Inflationary pressure may reduce

When the bank rate decreases:

• Banks can borrow funds more cheaply
• Lending rates may fall
• Credit availability may improve
• Economic activity may increase

The bank rate also impacts fixed deposit rates, lending behaviour and overall monetary stability.

How Bank Rate is Determined

The RBI determines the bank rate based on the country’s economic and financial conditions. The decision is generally aligned with the central bank’s monetary policy objectives, particularly inflation control and economic growth.

Factors influencing the bank rate include:

• Inflation trends
• Liquidity conditions
• Fiscal and monetary policy goals
• Economic growth forecasts
• Global financial developments
• Banking sector stability

The RBI may increase the bank rate when inflation is high or reduce it during periods of economic slowdown to support growth and lending activities.

Collateral

Considering the repo rate, it needs collateral like bond papers and government securities. But if you consider the bank rate, these loans are not secure. So, it is a fundamental difference between these two rates.

Tenure

Tenure for loans taken at a repo rate can be granted within one day time period. But when it comes to the loans at the bank rate, these rates have a time frame of around 28 days.

Loan Type

Both the repo and bank rates are the rates that RBI usually lends the loan. Banks pay an amount for interest on  the loan. In fact, the amount for these loans comes at the rate of the bank. The banks pay the central bank to buy the securities at a repo rate (which is not similar to the previous rate at which the bank had purchased the security).

Interest Rate

Note that the bank rate is greater than a repo rate considering the basis points, also termed as BPS. Now what does BPS mean? Simply put, the basis point is the 1/100th of the percentage point of one percent. The bank rate does not come with any collateral and is usually available for a prolonged period of time, so it is usually higher.

Objective

The next difference is in the prime objectives of these rates. While the bank rate loan serves long-term rates and needs, repo rates are the monetary mechanism that decides the overall liquidity rate.
 

Bank rate vs repo rate: Main difference

Tabulated below are the key differences between the bank rate vs repo rate:

Repo Rate Calculation

The repo rate determines the interest commercial banks must pay when borrowing money from the RBI against government securities.

Formula:

Interest Amount = Borrowed Amount × Repo Rate × Time Period

Example:

Suppose a commercial bank borrows ₹10 crore from the RBI at a repo rate of 5.25% for one year.

Interest payable would be:

₹10 crore × 5.25% = ₹52.5 lakh

This means the bank must repay the principal amount along with ₹52.5 lakh as interest to the RBI after the borrowing period.

If the repo rate rises, the borrowing cost for banks also increases. Banks may then pass this cost on to customers by increasing loan interest rates.

What Are The Current Repo Rate And Bank Rate 2026?

As of February 2026, the Reserve Bank of India (RBI) has kept the repo rate at 5.25%, while the current bank rate stands at 5.50%. These rates are reviewed during RBI Monetary Policy Committee (MPC) meetings and are used to control inflation, liquidity and economic growth in the economy. Changes in these rates can directly affect loan interest rates, EMIs and savings returns.

Conclusion

The repo rate and bank rate are two important monetary policy tools used by the RBI to manage inflation, liquidity and economic growth in India. While the repo rate mainly affects short-term borrowing by banks, the bank rate influences long-term lending costs and broader financial conditions.

Changes in these rates directly impact loan EMIs, deposit interest rates, consumer spending and business investments. Understanding how these rates work can help individuals and businesses make better financial decisions, especially when planning loans, investments or savings strategies.