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Why are there 2 different rates - Bank Rate & Repo rate? What is their different and applicability?

Date: 03 Feb 2011   Posted By: Shreela (Sen) Singh     Group: Government    Category: Central Government   

If the Bank rate & repo rate are both rates @ which the RBI lends to the commercial banks,
& if both are short term tools for controlling cash flow in the market,
then why are there 2 different rates, what is their difference & applicability?

Author: B Sreekanth Reddy    04 Feb 2011      Member Level: Bronze     Points : 2  (Rs 1)    Voting Score: 0

The Bank rate is the rate at which commercial banks, which are temporarily short of cash, can borrow from RBI.

The repo rate enables banks, to acquire funds from RBI by selling the securities and at the same time agreeing to repurchase them at a later date at a predetermined price.

So keeping securities and borrowing is repo rate, simple borrowing is bank rate.

Author: Apurva    05 Feb 2011      Member Level: Silver     Points : 3  (Rs 3)    Voting Score: 0

Hi Shreela,

Bank rate and repo rate have different purposes.

Bank rate is the rate at which RBI lends to the commercial banks and other financial intermediaries. Bank rates imply a long term outlook on the interest rates and are an outcome of a long term monetary policy. It is the bank rate based on which the commercial banks decide the lending rates to the customers. Hence, any change in the bank rates have direct bearing on the lending rates to the customers.

A repo transaction involves borrowing by the commercial banks from the RBI as a result of working capital mismatches and short term liquidity needs. This involves bank selling securities to RBI to borrow the money with an agreement to repurchase them at a later date and at a predetermined price. Hence, repo represents short term outlook.

Author: Chakravarthi (Emperor)    31 Mar 2011      Member Level: Gold     Points : 5  (Rs 5)    Voting Score: 0

Repo rate

Commercial banks borrow money from central bank by submitting securities. Here, interest rate is laid on the taken amount. This rate of interest is called repo rate. This is on short term basis and fixed at defined date and rate.

E.g.: This is like taking money at the usurer and taking back the thing which we have kept at him paying the money and interest back at pre-defined date.

Bank rate

This is also taking money from central bank. This is for longer period of time. Sale of securities is not included.

E.g.: This is like taking money from a person and paying monthly the interest for taken amount.

Similarities between repo rate and bank rate

Both rates are fixed by RBI.

Differences between repo rate and bank rate

- Repo rate is meant for short term basis. Bank rate is meant for long term basis.

- In repo rate, there is need of securities submission. In bank rate, there is no need of security submission.

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