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Difference between Bank Rate and Repo Rate

Difference between Bank Rate and Repo Rate

The bank rate and the repo rate are both forms of interest rates, but they serve different purposes. The bank rate is used to control the money supply, while the repo rate is used to control inflation. Knowing the difference between these two rates can help you make sound financial decisions.

What is Bank Rate?

Bank Rate is the rate of interest that commercial banks are charged when they borrow money from the Bank of England. The Bank of England uses Bank Rate as a tool to help it meet its target for inflation. By changing Bank Rate, the Bank of England can influence the amount of money that banks lend to businesses and consumers.

If Bank Rate is increased, banks will typically charge higher interest rates on loans and credit products, which can reduce spending and help to control inflation. Similarly, if Bank Rate is decreased, banks will usually charge lower interest rates, which can boost spending and help to support economic growth. The current Bank Rate is 0.10%.

What is Repo Rate?

Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation. A high Repo rate means that banks will borrow less from the RBI, leading to less money in circulation and ultimately controlling inflation. A low Repo rate means that banks can borrow more from the RBI, leading to more money in circulation and potentially causing inflation. Repo rates are decided by the Monetary Policy Committee of the RBI. The current Repo Rate is 4%.

Difference between Bank Rate and Repo Rate

Bank Rate and Repo Rate are both tools that the Reserve Bank of India (RBI) uses to manage liquidity in the banking system and ensure that banks have enough money to meet their day-to-day needs.

  • Bank Rate is the rate at which the RBI lends money to banks, while Repo Rate is the rate at which banks lend money to the RBI. Both rates are used to influence the amount of money that is available in the system, and both can be used to manage inflation.
  • Bank Rate is usually higher than Repo Rate, as it is seen as a more risky form of lending. The RBI uses these tools together to manage liquidity and ensure that banks have enough money to meet their needs.
  • By adjusting Bank Rate and Repo Rate, the RBI can influence the amount of money that is available in the system and help to keep inflation under control.

Conclusion

In this blog post, we’ve explained the difference between the Bank Rate and Repo Rate. We hope that this information has been helpful and provided some clarity on these two rates.

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