Bank Rate -Repo Rate vs Bank Rate - Bank Term Explained
Read all about the
Bank rate and how reserve bank of India uses the
Bank rate as a tool to control the money floating in the market.
What is Bank Rate?
Bank rate is the interest rate charged by the reserve bank of India on the banks and financial institution for the loans and advances provided to them.
How RBI uses the bank rate?
RBI uses the bank rate to control the money floating. Let us see how it happens.
If the RBI increases the bank rate
Increase in bank rate means that the banks will have to pay more money to the RBI as interest and hence the banks will look to increase the lending rate to customers. It means that any increase in bank rate will cause a subsequent increase customer lending rate of the banks.
In this scenario with the increased interest rate customers will not take the loans and hence the money will be kept back in the money market.
If the RBI decreases the bank rate
It will mean decrease in customer lending rate and it will mean more loans will be taken from the bank.
RBI uses this tool to control the bank credit.
Many people would now say that the repo rate is exactly the same as bank rate. But it is not so. Here are the main differences between the bank rate and the repo rate.
Repo rate
- Short term loan
- Just to meet the working capital demands in urgent cases
- Banks will have to sell the securities or bonds to the RBI as an assurance along with another agreement to pay back within a certain period
Bank rate
- Long term
- Probably die to any new monetary policy
- No need of securities
If you have any doubts regarding this topic please do comment below
Bank rate is the interest rate charged by the reserve bank of India on the banks and financial institution for the loans and advances provided to them.
How RBI uses the bank rate?
RBI uses the bank rate to control the money floating. Let us see how it happens.
If the RBI increases the bank rate
Increase in bank rate means that the banks will have to pay more money to the RBI as interest and hence the banks will look to increase the lending rate to customers. It means that any increase in bank rate will cause a subsequent increase customer lending rate of the banks.
In this scenario with the increased interest rate customers will not take the loans and hence the money will be kept back in the money market.
If the RBI decreases the bank rate
It will mean decrease in customer lending rate and it will mean more loans will be taken from the bank.
RBI uses this tool to control the bank credit.
Many people would now say that the repo rate is exactly the same as bank rate. But it is not so. Here are the main differences between the bank rate and the repo rate.
Repo rate
- Short term loan
- Just to meet the working capital demands in urgent cases
- Banks will have to sell the securities or bonds to the RBI as an assurance along with another agreement to pay back within a certain period
Bank rate
- Long term
- Probably die to any new monetary policy
- No need of securities
If you have any doubts regarding this topic please do comment below
Tags: difference between Bank Rate and repo rate, explain Bank Rate, Repo Rate vs Bank Rate, what is Bank Rate
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