Repo Rate vs. Bank Rate

The recent repo rate cut by RBI was announced on 7 August 2019, along with the reduction in the bank rate. The bank rate has been adjusted to 5.65% p.a. against the new repo rate of 5.40%. The lowering of both repo rate and bank rate indicates good times for borrowers, as commercial banks getting a lower rate, both with and without security converts to ordinary borrowers getting cheaper loans.  

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 about 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 the 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 recent in Repo Rate and Bank Rate?

The Reserve Bank of India (RBI) on 7 August 2019 slashed the repo rate by 35 basis points (bps) after which the repo rate stands at 5.40%. The bank rate has also been cut down which takes the current figure to 5.65%. Previously, the central bank had reduced the repo rate in the monetary policy review that happened in June 2019, by 25 bps.

The reduction in the repo and the bank rate could mean a reduction in the EMIs (equated monthly instalments) for borrowers if the rate cuts are passed on by the banks. Borrowers are likely to enjoy lower interest rates if banks reduce their lending rates which they can do only after evaluating their operating costs, cost of deposits, etc.

News About Repo Rate vs Bank Rate

  • Balance Transfer and Prepayment is the Answer to Home Loan Rate Hikes

    With the home loan rates surging incessantly, customers who had borrowed large amounts for home loans with lower interest rates might have to gear up to deal with the rate hikes. State Bank of India (SBI) has increased its marginal cost of funds-based lending rate (MCLR) by 20 basis points from 8.25% to 8.45%. Hence, the interest rates for the home loans offered by the bank will now range between 8.10% to 8.65% from the previous 7.90% to 8.45%. On the other hand, ICICI Bank has hiked both its 6-month MCLR and 1-year MCLR by 15 basis points. While these new rates will impact new borrowers immediately, these new rates will be implemented in the existing borrowers once the reset dates arrive.

    In case of a rise in interest rates, banks usually increase the tenure while keeping the EMI constant. However, borrowers can also opt for a higher EMI if cash flow is not an issue. This option is better in terms of the interest cost over the loan tenure. In order to counter the rising rates of interest, existing customers can also exercise other options such as balance transfer to a better home loan rate. This can be done after the individual compares the rates offered by the existing lender with other banks and non-banking financing companies (NBFCs).

    7 September 2018

  • RBI Governor set to launch UPI 2.0 today

    Despite multiple delays and roadblocks, the updated version of the UPI commonly called UPI 2.0 is all set to be launched by the National Payments Corporation of India at an event in Mumbai. State Bank of India chairman, Reserve Bank of India Governor and the non executive chairman of Infosys are expected to launch the updated version of UPI 2.0. It is expected that 10 banks will join UPI 2.0 right from the start including Axis Bank, HDFC Bank, State Bank of India, Yes Bank, and ICICI Bank. Other banks are in different stages of making updates to the payment product. The NPCI wanted the Governor of the RBI to launch the updated version of UPI just like the initial version. Many banks are looking at UPI 2.0 as a new mode of payment which is most likely to increase the number of transactions in the payment platform. It is most likely that banks will take a while to incorporate the product updates but things are expected to be stabilised in the coming months. While the new UPI version will not have the automatic recurring payments feature, features like block feature of digital platforms, overdraft facility, IPO subscription and a lot more will be available in UPI 2.0.

    17 August 2018

  • RBI approves Federal Bank request to open offices in Kuwait, Bahrain and Singapore

    Private sector lender Federal Bank has received approval from the Reserve Bank of India to open offices in Kuwait, Bahrain and Singapore. The bank is now waiting for local clearance to commence its operations in these countries. Federal Bank, headquartered in Kochi already has representative office in Dubai and Abu Dhabi. Their decision and desire to expand comes at a time when many of the major banks are reducing their overseas presence after the Rs.13,500 crore Nirav Modi scam. Many of the nationalised banks that account for most of the presence of domestic lenders in the overseas market have now started to slowly reduce their presence overseas. This step has been taken as part of a government directive. Many of the other private sector banks are however continuing their expansions overseas in the recent months. Federal Bank do not have plans to expand their presence locally but will focus on digital means to reach out to many more customers. The main focus of the bank will be on the unsecured lending segment, where its book stands at Rs.380 crore now. The bank is looking to double the loan book as the scope to for growth in this segment is very high.

    24 July 2018

  • Despite hikes in MCLR, average lending rates dip for PSBs

    Since the beginning of this year, banks have been increasing their lending rates and hiking their deposit rates. The weighted average lending rate for public sector banks fell by 30 basis points during the December quarter. This is despite the increase in the benchmark lending rate - marginal cost of funds based lending rate (MCLR). The MCLR increased by 10-20 basis points for some of the leading PSU banks in the last one year. Some of the market players believe that the PSU banks are looking to focus more on credit that is less risky with much lower yields. This looks to have brought down the overall lending rate for the PSU banks. Since the month of March, many more PSU banks have started to increase the MCLR by around 10-15 basis points. The risk averse lending approach however is continuing to have an an impact on the overall yield of the PSU banks. This cautious approach to less riskier and low yielding segments will continue to have a significant impact on the profitability of PSU banks.

    13 July 2018

  • Effective monetary tools used by RBI for liquidity management

    RBI has raised its policy repo rate to 6.25% by 25 basis points recently. In fact, this is the first time in the past 4 years that RBI has hiked the interest rate. Just like the policy repo rate RBI has some other effective monetary tools at its disposal to retain liquidity in the banking system. Here are the details of the key RBI monetary tools:

    Cash Reserve Ratio - Cash Reserve Ratio (CRR) is referred to the portion of cash deposits that banks hold with the RBI. When the CRR is reduced banks have more money in deposit, whereas when the CRR is increased banks have lesser amount to invest.

    Statutory Liquidity Ratio - The percentage of deposits that banks invest in government securities with the RBI is termed as the Statutory Liquidity Ratio (SLR). At present, the SLR is 19.5% which means for a deposit of Rs.100 received from a customer, the banks have to contribute 19.5% in government securities.

    Repo Rate - The fixed interest rate at which the banks can borrow money from the RBI by lending their surplus government securities is known as the Repo Rate. The more the repo rate, the costlier are the loans for the customers.

    Reverse Repo Rate - This is the rate of interest that RBI offers to the banks for borrowing their surplus funds for a short period of time. Currently, the reverse repo rate is 6%.

    26 June 2018

  • RBI going to purchase Rs.10,000 crore of government bonds for liquidity management

    RBI announced the purchase Rs.10,000 crore of Government bonds on Tuesday with a purpose of liquidity management. According to the Central Bank, the purchase of securities will be conducted under its open market operations. This decision has brought some respite to the bond market which is going through severe pressure due to the rising yields in spite of a plenty of regulatory measures. Expectedly, this move will give some relief to the struggling bond market.

    RBI has taken this decision after assessing the current liquidity condition of the market. Earlier, the previous week, RBI has withdrawn the clause that was forcing the foreign portfolio investors to purchase government bonds and state development loans having a minimum of 3 years of residual maturity. Moreover, in the month of April, the central bank has extended the limits for the FPIs to purchase Indian bonds. It also permitted banks to distribute the provisioning for losses on their portfolios of bonds over 4 quarter. However, unfortunately none of the measures worked to recover the demands. But with this new announcement, the bond market has taken a breath of relief.

    25 June 2018

  • Hike in RBI repo rate and its impact on home loans

    The Monetary Policy Committee (MPC) of the central bank has announced a hike in repo rate by 25 basis points. The rate now stands at 6.25%. This indicates that all bank loans will now be more expensive.

    It is interesting to note that almost all banks had hiked their lending rates (MCLR) by 0.1% in the last few weeks. Let us take a look at how this rate hike will impact the home loan sector.

    Consider a scenario in which you have taken a home loan worth Rs.20 lakh with an interest rate of 8.4%. Your EMI would then be Rs.1.68 lakh. At the time of a hike in interest rate by 25 bps (following repo rate hike), the interest rate will go up to 8.65%. This implies that your EMI will be Rs.1.73 lakh, an increase of Rs.5,000. The impact will be harder on higher loan amounts as well. This effectively means that if your home loan was worth Rs.2 crore, the EMI will go up by Rs.50,000!

    7 June 2018

  • RBI and Sebi give approval to NSE to launch repo in corporate debt securities

    Reserve Bank of India and market regulator Sebi provided their approval to stock exchange NSE to launch repurchase(repo) in corporate debt securities. BSE also recently got the approval from the regulators to introduce repo in corporate debt securities and is planning to start trading and reporting in the coming weeks. The step was taken in order to benefit and deepen the corporate bond markets. NSE is also planning to introduce an online web based trading platform specifically for tri-party repo market platform.

    29 May 2018

  • RBI meeting minutes reveal that there may be a rise in repo rate

    Recently, a monetary policy committee (MPC) meeting was held, in which the deputy governor of the Reserve Bank of India (RBI), Viral Acharya, said that he would most likely ask for withdrawing accommodation in the subsequent MPC meeting in the month of June. The meeting also addressed minimum support price hike. The governor of the RBI, Urjit Patel, spoke about inflation at the same meeting. The RBI intends to work towards achieving economic growth by enhancing the monetary policy. Mr. Acharya also said that inflation in India was associated with food, and that monetary policy should focus on addressing this.

    23 April 2018

  • HDFC raises rates on home loans making it the first hike since 2013

    Country’s largest mortgage firm, HDFC has hiked its Benchmark Prime Lending Rate (PLR) by 16.35% which will be will be effective from 1 April 2018 onwards. This is the first hike by HDFC since 2013 and will mark a shift in the trajectory of interest rates. For loans of more than Rs.30 lakh, the mortgage rates have been raised by up to 20 bps while for loans below Rs.30 lakh, the rates have been raised by 5 bps. The increase in the PLR will help the company retain their historic average margins in the range of 2.20% to 2.35%.

    For loans between Rs.30 lakh to Rs.75 lakh, the cost has been hiked to 8.60% from 8.40% while for loans above Rs.75 lakh the cost will increase to 8.70% from 8.50%. The cost of loans for Rs.30 lakh and below has been raised to 8.45% from 8.40%. There will be a rebate of 5 bps for all women borrowers on all the slabs.

    11 April 2018

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