Bank rate and repo rate are two the most commonly used tools by all banks to manage lending, borrowing, and money supply in an economy

These rates are utilized as a part of financial transactions and they assists to manage the money supply in country. Although, these rates are viewed as the same, but, there exist some major contrasts between these two rates which are explained in this article.

Bank rate

A bank rate is the interest rate at which a state’s central bank provides money to different commercial banks without requiring any collateral. It is used by central bank to regulate the long term policies related to money matters.

Dealing with the bank rate is usually preferred strategy with the help of central banks can direct the level of different economic activities. Low bank rates can assist to grow the economy, when level of unemployment is high, by bringing down the expense of funds for borrowers. On the other hand, higher bank rates rule in the economy, when level of inflation is more than desired level. The bank rate can likewise allude to the financing cost which banks charge clients on advances.

To explore another monetary tool that influences inflation, read the Difference between Deflation and Disinflation.

Repo Rate

Repo rate is usually the rate of interest at which banks acquire cash from the Central bank, in case of an inadequacy of funds.

The word ‘repo’ is actually an acronym for repurchase choice that goes about as a source of loan for short term, where the banks offer securities to the national bank, consequently for credit. The securities are the securities which are approved by government that go about as collateral.

Repo rate is a short-term instrument employed for controlling day-to-day liquidity within the financial system. Reducing the repo rate reduces the cost of borrowing for banks, thus inducing them to lend more to the public.

Bank Rate VS Repo Rate

Aspect Bank Rate Repo Rate
Definition Bank Rate is actually the interest rate, which is mostly imposed by the central bank of state on the advances, which is given to financial institutions and commercial banks. Repo rate is the interest rate at which short term credits are provided to different commercial banks by central bank against collateral.
Agreement In bank rate, nothing is there similar to repurchase agreement; just the money is loaned to banks and different financial institutions at interest rate fixed by central bank. In repo rate, there is repurchase agreement which includes sale of different securities to central bank i.e. to purchase back the sold securities at predetermined date and rate later on.
Main Concern Bank rate usually concerns with loans. The bank rate usually imposed to different commercial bank against the credit provided to them by means of central bank. Repo rate concerns with securities. This rate is usually imposed for repurchasing the sold securities.
Period Bank rate mostly provides long term loans to the commercial banks and financial institutions. Repo rate mostly concentrates on giving short term loans to different banks.
Collateral In bank rate, when loan is given to different banks and institutions, it is without any collateral. In repo rate, when loan is given to different banks, it is given after giving the bonds as collateral.
Higher Rate Bank rate is mostly higher than the other rates. Repo rate is mostly low as compare to other rates.
Effect Bank rate is high when, it means it will usually discourage the banks and people to take loans and this leads to bad effect on overall economy. Repo rate is utilized to cut down the liquidity in economy and in the state.

Rate Control in Action: What Do These Tools Really Mean?

Bank rate and repo rate might sound like techno-jargon on the surface, but they directly affect your life—especially if you’re an entrepreneur, work with loans, or care about economic trends.
Think of the bank rate as a long-term policy tool. When inflation is too high or too low, central banks can adjust the bank rate to tighten or loosen the money supply. Increasing the bank rate increases the cost of borrowing, reducing loan demand. This can slow down a white-hot economy but may also reduce investment.
Then think of the repo rate as a short-term control lever. It shifts daily liquidity around the banking system. Banks have access to central bank loans when they are strapped for cash. When the repo rate drops, banks get lower-cost loans—passing along that benefit to businesses and consumers in the form of lower interest rates.
The two rates work in tandem to provide financial stability. A repo rate increase can rein in spending immediately, while a long-term increase in bank rate can affect fiscal conduct over the long run. Both can impact anything from loan EMIs to interest you earn on your savings.
To learn how capital efficiency is connected to financial growth, explore Difference between Fixed Capital and Working Capital.