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Bank Rate Vs Repo Rate

Vikas Marele (CA in Service) (1144 Points)

21 March 2011

Can anyone tell me Diff between Bank Rate & Repo Rate........?

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Devkumar (Counselor) (106 Points)
Replied 21 March 2011

Bank Rate is the rate at which RBI lends money to other banks (or financial institutions) 


 The bank rate signals the central bank's long-term outlook on interest 
rates. If the bank rate moves up, long-term interest rates also tend to 
move up, and vice-versa. 

 Banks make a profit by borrowing at a 
lower rate and lending the same funds at a higher rate of interest. If 
the RBI hikes the bank rate, the interest that a bank pays for borrowing
 money (banks borrow money either from each other or from the RBI) 
increases. It, in turn, hikes its own lending rates to ensure it 
continues to make a profit.

 Repo or Repurchase rate is the rate at which banks borrow funds from the
 RBI to meet the gap between the demand they are facing for money 
(loans) and how much they have on hand to lend. 

 If the RBI wants to make it more expensive for the banks to borrow money, it 
increases the repo rate; similarly, if it wants to make it cheaper for 
banks to borrow money, it reduces the repo rate.

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Vikas Marele (CA in Service) (1144 Points)
Replied 21 March 2011

Thanks Dev, can u also explain reverse repo rate 2 me ......?

(Guest)

Reverse Repo Rate is the rate at which Reserve Bank of India (RBI) borrows money from banks. Banks are always happy to lend money to RBI since their money are in safe hands with a good interest. An increase in Reverse repo rate can cause the banks to transfer more funds to RBI due to this attractive interest rates. It can cause the money to be drawn out of the banking system.
.
Due to this fine tuning of RBI using its tools of CRR, Bank Rate, Repo Rate and Reverse Repo rate our banks adjust their lending or investment rates for common man.

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