Homebuyers may often hear about how a repo rate cut by the Reserve Bank of India (RBI) is likely to impact home loan interest rates. They may also hear similar things being mentioned when the banking regulator reduces the bank rate. This may lead them to confuse the two terms – bank rate and repo rate.
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Bank rate vs repo rate
The repo rate and bank rate are two different types of interest rates that the RBI charges from scheduled banks in India to lend funds to them. India’s banking regulator can grant loans to banks, with or without the pledging of securities and collateral. This very fact creates a difference between the bank rate and the repo rate. (Read our guide on RBI monetary policy repo rate)
Bank rate and repo rate are short-term lending rates and are periodically changed by the RBI, to maintain credit flow in the market.
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What is bank rate?
Bank rate is the interest rate that RBI charges when the borrower bank does not provide any security against the loan. Also known as discount rate, bank rate allows banks to borrow from the RBI without having to provide any collateral or securities. This means they do not have to sign any repurchase agreement with the apex bank. At present, the RBI charges 6.75% bank rate from banks on lending funds.
See also: All about CRR or cash reserve ratio
What is repo rate?
Repo is the interest rate that the RBI charges from banks, on loans against which they provide a security. Since there is a security involved, the RBI and the borrower bank sign a repurchase agreement. In this repurchase agreement, the bank promises to repurchase the securities or bonds they provide as the collateral on a certain date, at a predetermined price.
As on April 5, 2024, the RBI charges 6.50% repo rate from banks on lending funds.
See also: What is repo rate?
Bank rate vs repo rate: Main difference
| Parameter | Bank rate | Repo rate |
| Rate | Bank rate is usually higher than repo rate. | Repo rate is usually lower than the bank rate. |
| Security | Bank is not liable to provide any security against the loan. | Bank is liable to provide a security against the loan |
| Agreement | No requirement to sign a repurchase agreement, as there is no collateral involved. | The RBI and the bank have to sign a repurchase agreement. |
| Objective | Bank rate focuses on a bank’s long-term financial goals. | This means RBI provides short-term loans at repo rate, to cater to the short-term financial requirements of financial institutions. |
| Impact | In case of high bank rate, liquidity in the system contracts. Lower bank rates are meant to encourage borrowing. | A cut in repo rate means borrowers will be offered loans at lower rates. The opposite is also true – a hike in repo rate will increase the cost of borrowing for the borrower. |
| Other names | Bank rate is also known as discount rate. | Repo rate refers to repurchase option. |
| Tenure | Bank rate can be offered for overnight loans or fortnights. | Repo rate has a short tenure of a day. |
| Policy tools | Decision on bank rate change is taken during the RBI’s bi-monthly monetary policy. | Decision on repo rate change is taken during the RBI’s bi-monthly monetary policy. |
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An alumna of the Indian Institute of Mass Communication, Dhenkanal, Sunita Mishra brings over 16 years of expertise to the fields of legal matters, financial insights, and property market trends. Recognised for her ability to elucidate complex topics, her articles serve as a go-to resource for home buyers navigating intricate subjects. Through her extensive career, she has been associated with esteemed organisations like the Financial Express, Hindustan Times, Network18, All India Radio, and Business Standard.
In addition to her professional accomplishments, Sunita holds an MA degree in Sanskrit, with a specialisation in Indian Philosophy, from Delhi University. Outside of her work schedule, she likes to unwind by practising Yoga, and pursues her passion for travel.
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