Repo rate and bank rate play a very important role in the economy of any country. These are the tools that help to regulate the flow of money in the nation. Both the terms repo rate and bank rate are very important in the banking sector. In this article, we will discuss repo rate and bank rate, the difference between Repo rate and bank rate, their role in our economy, and the cause of inflation.
Table of Contents
Repo rate Vs Bank Rank
|Repo Rate||Bank Rate|
|Repo rate is the interest rate at which central banks of the country provide loans to the commercial banks of the nation for a short time period||While bank rate is the markdown rate at which central banks of the contact provide loans to the commercial and monetary organization.
|In Repo rate commercial banks have to sell their assets to the Central Bank of the nation with a repurchase signed agreement||In Bank rate no need to sell the assets and also no need to sign a repurchase agreement.|
|An increase in the repo rate does not affect normal people.||An increase in the Bank rate directly affects the normal customer.|
|In repo rate, the interest rate is imposed on the collateral.||In bank rate interest is directly charged on the given amount of money.
|In repo rate security, agreements and guarantees are included||But at the bank rate, no insurance is offered.
|Repo rate is used to fulfill short-time needs of money.||Bank rates are used to fulfill the long term needs of money
|Lower Than the bank Rate||Always higher than the repo rate|
when commercial banks of the country borrow money from the central bank of the country. The rate at which the central banks provide loans or money to the commercial bank is known as the bank rate. The bank rate is the rate that is charged by the central bank for a non-collateralized the provide to the commercial banks. The bank rate is the most important factor to control the economy of the country. To control the economy central bank reduces the bank rate by which more people take the loans.
With more loans the flow of money in the market increases. When the money flow reaches a sufficient level central bank increase the bank rate. In this way government easily controls the economy of the country. The bank rate is used to determine the economy’s monetary policy. At the bank rate, there is no need for a security sold or repurchasing agreement. Commercial banks provide loans and money to the people of the nation at higher interest rates in this way they generated profit.
When people don’t have money in that case they approach banks for the money. Same when banks don’t have sufficient money to give people in that case banks borrow money from the central banks of the country against selling their security or bonds with an agreement to purchase again at a fixed time and predefined price. So the repo rate is the rate of interest at which the central bank provides loans or money to the commercial banks for a certain time period.
In other words when a commercial bank needs a loan for the short term from the central bank of the country. Central Bank charged some unrest against their money that rate is known as repo rate
For example, PNB needs a 100 crore loan for the short term. In that case, PNB gives worth 100 crore collateral to the RBI. PNB signed an agreement in which it is clearly mentioned that they will repurchase this collateral in 108 crores after 6 months. This agreement is known as a repurchase agreement and this is known as repo rate. When PNB repurchases this agreement they pay 108 crores at the rate of 8% interest rate.
Reverse repo rate
As the name indicates it is the opposite of the repo rate in which commercial banks get more interest on their deposited money in the central bank of the country. This is also a very important tool to control inflation in the market. When the flow of money increases in the market it leads to an increase in inflation. In that case, the central banks of the nation increase the reverse repo rate in that case banks deposit their money to the central bank to get more interest. In this way central banks maintain inflation.
Reverse repo rate = Repo rate -1%
The key difference between Repo rate and Bank rate
- Repo rate is the interest rate at which central banks of the country provide loans to the commercial banks of the nation for a short time period. While bank rate is the markdown rate at which central banks of the contact provide loans to the commercial and monetary organization.
- In Repo rate commercial banks have to sell their assets to the Central Bank of the nation with a repurchase signed agreement. At the bank rate no need to sell the assets and also no need to sign a repurchase agreement.
- In the repo rate, the interest rate is imposed on the collateral. In bank rate interest is directly charged on the given amount of money.
- Repo rate is applied on the repurchase of the collateral by the commercial banks. The bank rate is used to move forward commercial banks with national banks.
- In repo rate security, agreements and guarantees are included. But at the bank rate, no insurance is offered.
- Repo rate is used to fulfill short-time needs of money. Bank rates are used to fulfill the long term needs of money
Both of Repo rate and bank rate are very useful tools to control the inflation in the country very effectively. With these powerful tools, our government easily controls the economy of the country. If we talk about inflation cause the main cause of inflation is the flow of money in the market. If the flow of money increase in the market the inflation rate increases. And when the circulation or flow of money decreases in the market inflation decrease.
With an example, we will use understand what is inflation and its cause. For example, if the flow of money is increase in the market people will go for more purchases. They will purchase unnecessary things which increases the demand and supply of the things which will increase the inflation rate. A very easy example is supposed the price of 1 kg onion is 30 Rs. And peoples are purchasing it as per their requirement, in that case, no effect on the demand and supply of the onion.
On the other hand, if people have more money now more people will buy more onion by this there is no change in the production of the onion. In that case with the shortage of the onion, its price will rise. In this way inflation rate increases. So the inflation rate directly depends upon the money flow rate in the market. More money more inflation, less money low inflation rate. So Repo Rate and Bank Rate are very important tools to regulate the flow of money in the market.
We hope you understand the concept very well. Some other differences like the difference between current and saving accounts, the difference between sip and mutual funds are very important to understand for better growth in the money sector. For more information please visit our website.