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by 5paisa Research Team Last Updated: 2023-09-14T13:22:19+05:30
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Bank Rate Vs Repo Rate are the popular rates computed for borrowing or lending activities by commercial and central banks. They are nothing but the lending rates at which the central bank funds financial institutes and commercial banks.
While these rates have sheer differences, one thing that's common is that both are short-term rates. They are sued for controlling cash flows in a market. Most often, they are mistaken as one, but there are a few differences, which this post has compiled. 
Before you delve into the details of their significance and definitions, you need to comprehend what they are. On that note, the repo rate is the rate at which RBI lends to commercial banks by buying securities. Contrarily, the bank rate is the lending rate at which commercial banks borrow from RBI without securities. Get an insight into the intricate details of these two terms from the given pointers.
 

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.
 

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.
 

Differences between Repo Rate and Bank Rate

Before outlining the bank rate vs repo rate differences, you first need to learn the similarities between these two rates: the bank rate and repo rate. In both instances, it's RBI that determines the rate. Note that the banks may borrow loans from the RBI. Both the rates help control the overall money flow and the inflation rate by regulating the economy.
Now, if you wish to learn the differences between these two rates, you need to learn the following distinguishing parameters:
 

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:

Factors Determining the Key Differences

Bank Rate

Repo rate

Security

The bank does not remain liable to offer any security against this loan at the bank rate.

At the repo rate, a bank is liable to offer security against the loan.

Rate

Considering the rate of interest, the amount is higher considering the bank rate

The repo rate is lower than a bank rate

Key Goals

Bank rates aim to assess the long-term monetary goals of a bank.

RBI offers short-term loans at the repo rate. The prime intention is to cater to the short-term financial needs of any financial institution.

Impact

A high bank rate involves liquidity in a system of contracts. The lower bank rates only encourage borrowing.

When there's a cut in the repo rate, borrowers usually will get offered loans at a lower rate. So, a hike in the rate increases the borrowing cost.

Also Known As

Discount rate

Repurchase option

Tenure

This rate is available overnight or on fortnights.

This rate is available within a short tenure of one day.

Agreement

No need to sign the repurchase agreement because no collateral is involved.

The bank and RBI both need to sign the repurchase agreement.

 

What Are The Current Repo Rate And Bank Rate 2023?

Up until February 8, 2023, the repo rate stands at around 6.50%. On the other hand, the bank rate is at 6.75%. The prior hike on December 7, 2022, led to a repo rate of 6.25%, while the bank rate was 6.50%. 
Any reduction in the bank or repo rate will allow borrowers to avail loans at a lower interest rate. But an upsurge in the repo rates will also have a corresponding increase in the loan's interest rates. As of February 8, 2023, the repo rate was elevated by 25 points as per the monetary policy statement by the RBI's governor.
 

Conclusion

So, that compiles everything to learn about the difference between bank rate vs repo rate. Now that you have learned the bank rate vs repo rate difference, it is time to learn a few FAQs from below.

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Frequently Asked Questions

No, the bank rate and repo rate are not similar. In fact, a repo rate is lower than a bank rate. The repo rate needs collateral like bond papers, government securities, etc., but a bank rate loan does not require collateral as it is unsecured.

Yes, RBI can take loans from commercial banks during times when there's excessive liquidity in the market. The banks can reap the benefits by getting the interest. During any high level of inflation, the RBI will increase its reverse repo.

The bank rate and repo rate change every year. The sixth revision occurred on February 8, 2023, which took the repo rate to around 6.50 percent. The prior revisions included the 40 bps increase on May 4, 2022. The most current Repo Rate fixed by RBI happens to be 6.50%.