Bank Rate And Repo Rate: Definition, How It Works And Current Rate

May 03 2024

Bank Rate: The bank rate is an important term in the banking sector. Candidates preparing for bank exams come across this term in the banking awareness section. Aspirants in search of bank rate meaning, bank rate in India, bank rate current, etc., can have a look at the complete details related to the bank rate provided here. The interest rate that a central bank levies on loans it extends to commercial banks is known as the "bank rate." A bank may borrow money from a nation's central bank if it runs out of funds. That would be the Reserve Bank of India in the case of India. The borrowing is carried out in accordance with the monetary policies of that nation. The RBI will buy or discount bills of exchange and other similar commercial instruments at this standard rate as well. Commercial banks would have to raise their lending rates in tandem with the central bank's or the Reserve Bank of India's hikes in the bank rate. Thus, RBI manages market liquidity by adjusting the benchmark policy rate.

Banking Awareness Free PDFs

What is a Bank Rate?

Bank Rate Meaning: Under Section 49 of the Reserve Bank of India Act, 1934, the Bank Rate has been defined as "the standard rate at which the Reserve Bank is prepared to buy or re-discount bills of exchange or other commercial paper eligible for purchase under the Act." The Reserve Bank of India (RBI) lends money to commercial banks at the "bank rate" at which it does not hold any collateral. No repurchase agreement will be drafted or agreed to without any form of collateral. Short-term loans with collateral are permitted by the RBI. Repo Rate is the term for this. Indian banks' interest rates are set by the RBI. Due to its capacity to control liquidity, it is typically greater than a Repo Rate.

History of Banking in India

Bank Rate Current

Presently, the maintenance of the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR) only employ the bank rate to determine the penalty for default.

What Is The Bank Rate In India?

As per the RBI Policy rates the current bank rate in India is 6.75%. Since the bank rate is a crucial instrument for controlling liquidity, it is typically higher than the repo rate. Bank Rate, also referred to as "Discount Rate," is frequently mistaken for Overnight Rate. The overnight rate is the interest rate charged when banks borrow money from one another, as opposed to the bank rate, which is the interest rate the central bank charges on loans given to commercial banks. When the RBI raises the bank rate, banks' borrowing costs rise as well, which decreases the amount of money available on the market.

About Regional Rural Banks in India

How Bank Rate Is Determined?

A country's central bank, which regulates the banking industry and the amount of money in the economy, sets the interest rate. This is often carried out every three months to maintain the country's currency rates and limit inflation. A country's economy is affected by a bank rate change in a cascade of ways that affect all areas of the economy. For instance, changes in interest rates cause changes in stock market prices. Customers are impacted by changes in bank rates since they affect the rates at which they can obtain loans.

Bank Rate Vs Repo Rate

Bank Rate vs Repo Rate: Even while the Repo Rate and Bank Rate are both set by the central bank and used to monitor and manage the market's cash flow, they also have some notable differences.

Government Banks in India

Bank Rate Vs Repo Rate
Bank Rate	Repo Rate
Loans given by the central bank to commercial banks are subject to bank rates.	Repurchasing securities that commercial banks have sold to the central bank is subject to a repo rate.
Bank Rate is charged without using any collateral.	When the Repo Rate is levied, securities, bonds, agreements, and collateral are involved.
Repo rates are lower than the bank rates always.	Due to its capacity to control liquidity, it is typically greater than a Repo Rate.
An increase in the bank rate has a direct impact on the interest rates offered to customers, which limits their ability to get loans and harms overall economic growth.	The banks typically handle Repo Rate increases, so clients are not immediately impacted.
The long-term financial needs of commercial banks are met by Bank Rate.	Repo Rate emphasizes short-term financial needs.

FAQs - Bank Rate In India

Q. What is a bank rate?

The Reserve Bank of India (RBI) lends money to commercial banks at the "bank rate" at which it does not hold any collateral.

Q. What is the current bank rate in India?

As per the RBI Policy rates the current bank rate in India is 6.75%.

Q. The bank rate is determined by which organization?

RBI determines the bank rate in India.

Q. Whether bank rate and repo rate are same?

No. The Reserve Bank of India (RBI) lends money to commercial banks at the "bank rate" at which it does not hold any collateral. No repurchase agreement will be drafted or agreed to without any form of collateral. Short-term loans with collateral are permitted by the RBI. Repo Rate is the term for this.