Banking Rates: Repo Rate, Bank Rate & Base Rate

Consider a situation where John's bank doesn't have enough money to give out loans or handle it's daily expenses.

In this situation, the bank asks RBI (Reserve Bank of India) for some funds in return of securities or bonds.

The RBI loans the bank some money but on a certain rate of interest with an agreement to repurchase the securities on a certain date at a predetermined price. This rate is known as the Repo Rate.

Since the bank has enough funds now, it gives out loans to people in need.

These loans charge an interest rate greater than the Repo Rate. This way the bank starts earning money.

Therefore, in a way the RBI controls the amount that is there in the economy.

The minimum rate of interest charged by the bank to the consumer is known as the Base Rate. (decided by the bank itself)

But if there's no involvement of securities or bonds, then the rate is called as Bank Rate.

Bank Rate is usually higher than the Repo Rate. It is an important tool to control liquidity.