what is the Difference between bank rate and repo rate

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Difference between bank rate and repo rate

Bank Rate and Repo Rate square measure the tools of tally that helps to regulate the cash offer within the economy. They’re the disposal rates, at that the apex bank of the country lends funds to the banking concern. The discount refers to the quality rate, at that the financial institution of Asian country without delay purchases or rediscounts bills of exchange and alternative cash equivalent, that square measure eligible for purchase beneath the act.

Conversely, once the financial set-up of the country encounters liquidity shortages and therefore the interest rates square measure rising, the tallies purchases government securities from banks and pays for constant, to raise the liquidity position of the country and expand credit. The method is thought as repurchase action and therefore the rate at that the securities square measure bought is named repo rate.

comparison Bank rate Repo rate
meanings Bank Rate is that the rate of interest that is charged by the financial organization on the loans it advanced to business banks and alternative monetary establishments. The speed at that the financial organization grants short term loans to business banks, against collateral square measure referred to as Repo Rate.
repurchase no yes
Deals with loans securities
Time frame Long time Short time
collateral Not involved involved
Which is higher higher lower

 

Definition of bank rate:

By the term discount rate, we have a tendency to mean Associate in nursing charge per unit, charged by the country’s financial organisation on the loans and advances extended to the domestic banks sort of a banking company, cooperative bank, development banks and different monetary intermediaries. These loans cater future monetary needs of banks and monetary intermediaries. It’s regulated by Central bank’s long-run financial policies.

Bank Rate is one amongst the essential tools of the financial organisation, that regulates the economic activity level, i.e. to manage liquidity, the apex bank can increase discount rate and contrariwise. As a results of that the cost of banks goes up, and therefore the credit provide within the economy goes down.

Definition of Repo Rate:

Repo rate is that the rate at those banks borrows cash from the financial organisation, on the event of a deficiency of funds. The term ‘repo’, is Associate in nursing descriptor for repurchase choice that acts as a supply of short borrowing, during which the banks sell securities to the financial organisation, reciprocally for credit. The securities square measure government approved securities, that act as collateral.

Central bank uses this tool to manage cash in hand within the country’s medium of exchange, i.e. the decrease within the repo rate indicates that the bank’s price of borrowing is reduced whereas if the repo rate goes up, it represents that bank’s borrowing rate is pricey, that ultimately leads to the autumn in cash in hand within the economy. During this approach, it conjointly helps the got authorities to curb inflation.

Key variations between bank rate and Repo Rate:

Bank Rate is that the discount rate at that the financial organisation extends a loan to the commercial bank depository monetary institution banking concern banking company and financial establishments. Repo Rate is delineated as a rate at that financial organisation extends a short loan to the banking company.

In a discount rate, there’s nothing like repurchase agreement; solely the money is Lenten tide to banks and monetary intermediaries at a set rate. Conversely, in Repo Rate, the sale of securities to the financial organisation, on a repurchase agreement, i.e. to shop for backs the securities at a planned rate and date within the future.

The discount rate is charged on the loan extended to the banking company by the apex bank. As hostile Repo Rate, is that the rate of interest, charged on the repurchase of securities.

In general, discount rate caters future fund demand of the industrial banks whereas the repo rate focuses on providing short finance to banks.

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