Difference between Bank Rate and Repo Rate

Bank rate and repo rate are two usually utilized rates for lending and borrowing that are commonly utilized by the central and commercial banks. These rates are utilized as a part of financial transactions and it assists to manage the money supply in country. Albeit, 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 can be said as the interest rate at which a state’s central bank provides money to different commercial banks. 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.

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. Central bank utilizes this tool to direct the money supply in the nation’s financial framework, i.e. the reduction in the repo rate demonstrates that the bank’s expense of getting loan is diminished while if repo rate increases, it speaks to that bank’s expense of getting loan is more that eventually brings about the decrease in money supply in an economy.

Bank Rate VS 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 imposed usually 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 when high, 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.

Conclusion

From the above article we can end up with the above discussion that bank rate is interest rate imposed by the central bank on the advances given to financial institutions and commercial banks while repo rate is interest rate at which short term credits are provided to different commercial banks by central bank against collateral. Bank rate is mostly high and concerns with loans without repurchase agreement and collateral but repo rate is mostly low, and concerns with securities with repurchase agreement and collateral. Bank rate is when high, it means it will usually discourage the banks and people to take loans and this leads to bad effect on overall economy however repo rate is utilized to cut down the liquidity in economy and in the state.