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Central Bank Rates (RBI rates)

Market Live brings in the Stock Market Tutorial which explains the basics of Economics. Get to know all the information that you ever wanted to know on the various rates fixed by the Central Bank (RBI), and what they mean to you.

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RBI

Bank Rate

To put it in simple terms, Bank Rate is the interest rate at which the Central Bank or the RBI, lends funds to other banks in the country. In some cases, this is also called as the Discount rate. It is essentially, the rate at which the RBI usually gives loans and advances to various other national banks.

Any change in the bank rates will affect the customers. We all know that the banks in any country, make a profit by borrowing funds at a lower rate and lending the same at a much higher rate to its customers. If the RBI increases the bank rate, then the interest that a bank has to pay for borrowing money increases. This in turn, will result in the commercial banks hiking their own lending rates to ensure that they make a profit. Thus the customers of these banks or borrowers of personal loans and housing loans from these banks will have to pay more for the higher interest rates.

RBI often uses the bank rate to control the supply of currency in the economic system.

When the RBI increases the bank rate, it becomes more expensive for commercial banks to borrow. Thus borrowing becomes less attractive. This reduces the money supply.

However when the RBI decreases the bank rate, the commercial banks would be attracted to borrow more from the RBI. This would increase the money supply.

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rupee notes

Repo Rate

Repo rate is the short form for ‘Repurchase rate’.

It is the rate at which the commercial banks will borrow the funds from the RBI against the securities, to meet the shortage of funds.

Technically, ‘repo’ in this context is the sale of securities by the commercial banks to RBI, together with an agreement for the seller to buy back the securities at a later date. The repurchase price should be greater than the original sale price, the difference effectively representing interest, or called as the repo rate.

Difference between Repo and Bank rates

The repo rate is applicable when the commercial banks borrow funds from RBI, by mortgaging their securities. As mentioned above, the banks sell their securities to the RBI, with an agreement to re-purchase them in future, at a higher price. Hence the name “repurchase agreement” or “repo”. It is generally done by the banks for a short duration.

Bank rate is the rate at which the banks borrow money from the RBI, but here no selling of securities is involved. Bank rate is a more quantitative instrument to control the money supply by the RBI and is generally influenced by the government’s monetary policies. Bank rates reflect the longer term outlook of the RBI about the economy.

Continue Reading : Reverse Repo rate and the CRR


 

 

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