Repo Rate vs. Bank Rate
The Reserve Bank of India (RBI) has decreased the repo rate on 6 June 2025 by 50 basis points to 5.50%. Earlier, the repo rate was 6.00%. This is the third repo rate revision by the Monetary Policy Committee (MPC) in two years after the first revision in rates which took place on 7 February 2025 and second revision on 8 April 2025. The bank rate stands at 5.75%. These changes aim to support economic growth while maintaining financial stability.
Differences between Repo Rate and Bank Rate
Repo Rate and Bank Rate are the two most popular rates calculated for borrowing and lending activities carried on by commercial and central banks. They are the lending rates at which the Central Bank of India lends funds to commercial banks and other financial institutions. While both rates are short-term tools used to control the cash flow in the market and are often mistaken to be one and the same, there is some noteworthy difference between the two.
Before we make a comparison between the repo rate and the bank rate, it is important to first understand what both these terms mean. Simply put, repo rate is the rate at which the RBI lends to commercial banks by purchasing securities while bank rate is the lending rate at which commercial banks can borrow from the RBI without providing any security. Both terms have been explained in a descriptive manner in the subsequent sections, along with their comparisons.
Key differences between Repo Rate vs Bank Rate
Though Repo Rate and Bank Rate have few similarities like both is fixed by the central bank and used to monitor and control the cash flow in the market, they have some prominent differences too.
Take a look at the differences between Repo Rate and Bank Rate below.
- Bank Rate is charged against loans offered by the central bank to commercial banks, whereas, Repo Rate is charged for repurchasing the securities sold by the commercial banks to the central bank.
- No collateral is involved while charging Bank Rate but securities, bonds, agreements and collateral is involved when Repo Rate is charged.
- Repo Rate is always lower than the Bank Rate.
- Increase in Bank Rate directly affects the lending rates offered to the customer, restricting people to avail loans and damages the overall economic growth, whereas Increase in Repo Rate is usually handled by the banks and doesn't affect customers directly.
- Comparatively, Bank Rate caters to long term financial requirements of commercial banks whereas Repo Rate focuses on short term financial needs.
Though Bank Rate and Repo Rate have its own differences, both are used by RBI to control liquidity and inflation in the market. In a nutshell, the central bank uses these two powerful tools to introduce and monitor the liquidity rate, inflation rate and money supply in the market.
What is Repo Rate?
When we experience a financial shortfall, we approach the bank for loans. Likewise, when banks fall short of funds, they approach the central bank for financial assistance. Repo Rate is the rate at which the country's central bank, which is RBI in India, lends money to commercial banks during financial crisis. In other words, commercial banks borrow money from the Reserve Bank of India by selling securities or bonds with an agreement to repurchase the securities on a certain date at a predetermined price.
The rate of interest charged by the central bank on the cash borrowed by commercial banks is called the "Repo Rate". For example: If the Repo Rate is 10% and the loan amount borrowed by a commercial bank from RBI is Rs 10,000, then the interest paid to the RBI will be Rs 1,000.
On the contrary, when a commercial bank has excess funds, they can deposit the same in the central bank and earn "Reverse Repo Rate" interest. For example: If the Repo Rate is 10% and the funds deposited by the commercial bank to the RBI account is Rs 10,000, then, the interest paid to the commercial bank by RBI is Rs 1,000.
Repo Rate also decides the liquidity rate in the banking system. If RBI wants to increase the liquidity rate, they will reduce the Repo Rate and encourage the banks to sell their securities and if the central bank wants to control liquidity, they will increase the interest rate, discouraging banks to borrow easily. An increased Repo Rate means that the central bank will earn a higher interest rate from the commercial banks, while an increased Reverse Repo Rate means that the commercial banks earn high interest from the central bank.
What is Bank Rate?
The rate of interest charged by the central bank on the loans they have extended to commercial banks and other financial institutions is called "Bank Rate". In this case, there is no repurchasing agreement signed, no securities sold or collateral involved. Banks borrow funds from the central bank and lends the money to their customers at a higher interest rate, thus, making profits.
Bank Rate is usually higher than Repo Rate as it is an important tool to control liquidity. Also known as "Discount Rate", Bank Rate is often confused with Overnight Rate. While the bank rate refers to the interest rate charged by the central bank on loans granted to commercial banks, overnight rate is the interest charged when banks borrow funds among themselves. When Bank Rate is increased by RBI, bank's borrowing costs increases which in return, reduces the supply of money in the market.
What is the current Repo Rate and Bank Rate?
As of 6 June 2025, the repo rate stands at 5.50% after a reduction of 50 basis points as per the Reserve Bank of India (RBI). The bank rate and Marginal Standing Facility Rate (MSFR) stands at 5.75%, while the reverse repo rate stands at 3.35%. The previous revision in rates took place on 8 April 2025, when the repo rate and bank rate stood at 6.00% and 6.25%, respectively.
Any reduction in the repo rate and bank rate will allow borrowers to avail loans at lower interest rates but an increase in repo rates will have a corresponding increase in the interest rates of loans.
FAQs on Repo Rate vs. Bank Rate
- What distinguishes a bank rate from an interest rate?
The rate of interest is not a tool of credit management since it is not set by the central bank, but the bank rate is a quantitative tool used in the economy to control the state of inflation and deflation.
- What effects do the bank rate and repo rate have on the economy?
The two monetary policy instruments that central banks utilise to affect economic circumstances are the bank rate and the repo rate. Central banks can influence borrowing, spending, and investment by changing these rates. Reducing borrowing costs through lowering bank or repo rates can boost economic activity, while raising rates can reduce inflationary pressures and rein in excessive lending.
- Do bank rates and repo rates have the same values everywhere?
No, these rates may have different names and terminology in other nations. The language and frameworks used by various central banks to control interest rates and liquidity in the banking sector may differ. To comprehend the comparable rates in a certain nation, it is crucial to consult the central bank's policy.
- Is a higher repo rate considered to be good?
Monetary authorities use the repo rate to manage inflation. Central banks raise the repo rate in an inflationary environment to discourage banks from borrowing from them. In the end, this lowers the amount of money in the economy, which aids in halting inflation.
- After an increase in the repo rate, will FD rates rise?
There is a clear relationship between the interest rates on fixed deposits and the repo rate. FD interest rates rise in tandem with an increase in the repo rate and fall in tandem with a decrease in the repo rate. This is a definite relationship.
- Why is the repo rate higher than the bank rate?
The bank rate is never higher than the repo rate. An increase in bank rates has a direct impact on lending rates that customers are provided, which limits credit availability and hinders economic growth generally. In contrast, an increase in repo rates is typically managed by banks and has no direct impact on customers.
- How is the repo rate determined?
The plan is to sell them back at a suitable time. All things considered, if the business bank receives Rupees 100 crore in cash and the RBI sets a repo rate of 5%, the premium paid to the national bank will be calculated at Rupees 5 crore on an annualised basis.
- The reverse repo rate is high; why?
With all else being equal, a rise in the reverse repo rate will result in a drop in the money supply and vice versa. The amount of money on the market will decrease due to commercial banks having greater incentives to park their funds with the RBI due to an increase in the reverse repo rate.
News about Repo Rate vs Bank Rate
RBI has increased repo rate by 25 bps
The repo rate was raised by 25 basis points according to the Monetary Policy statement issued by the governor of the Reserve Bank of India (RBI) on 8 February 2023.
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