Bank Rate vs Repo Rate: Meaning, Differences, & Impact Explained
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Repo rate and bank rate are the two major rates one must consider when applying for a loan. Lending institutions and commercial banks use these rates to determine loan interest rate. Since there is a sheer difference between bank rate and repo rate, let’s learn what is meant by repo rate and bank rate to get a better understanding.

What is the Repo Rate?

Want to understand the repo rate meaning? Repo rate full form is Repurchasing Option. It is the rate at which the central bank repurchases securities from commercial banks.

Impact of Repo Rate

The repo rate in India decides the banking system’s liquidity rate. When the RBI wants to boost the liquidity rate, it reduces the repo rate, encouraging banks to sell their securities. However, if the RBI wants to lower liquidity, it discourages banks from borrowing by increasing the repo rate.

Also Read- Exploring MCLR, BPLR, Base Rate, and Repo Rate in Home Loans

How is Repo Rate Determined?

Apart from the inflation rate, the central bank also determines the repo rate based on factors like economic growth.

What is a Bank Rate?

The bank rate is also known as the discount rate. It is the rate at which commercial banks and lending institutions borrow money from the RBI, the central bank of India.

Impact Bank Rate

Monetary authorities use bank rates to control inflation. When inflation increases, the RBI increases the bank rate to discourage banks from borrowing money from the central bank. This ultimately decreases cash flow in the economy, thereby controlling inflation.

How is Bank Rate Determined?

What is the current bank rate depends on the prevailing inflation rate of a country. The Reserve Bank of India determines the bank rate based on inflation. When the inflation rate exceeds the acceptable rate, it increases the bank rate to control inflation.

Differences Between Bank Rate vs Repo Rate

Although bank and repo rates seem similar and control and monitor cash flow in the market, they also have some differences. Now that you understand what is bank rate and repo rate, let’s discuss them from a bank rate vs repo rate perspective.

Parameter Repo Rate Bank Rate

What is the Bank Rate vs Repo Rate?

The central bank charges a repo rate for repurchasing securities from commercial banks.

The RBI charges bank rates against loans they offer to commercial banks.

Collateral Involvement

When the central bank charges a repo rate, it involves collateral, bonds, securities, and agreements for the transaction.

When the RBI charges a bank rate, it does not involve any securities.

Which is Higher?

The repo rate is higher than the bank rate.

The bank rate is lower than the repo rate.


Repo Rate Calculation

Understood what do you mean by repo rate? It’s now time to calculate it.

Commercial banks must secure a standard rate as a repo rate. The interest rate they pay to the central bank or receive when they deposit funds in the RBI must be standardised according to mutual consideration. The mathematical formula for repo rate calculation is as follows:

Repo Rate = (Repurchase Price – Original Selling Price / Original Selling Price) * (360 / n)


Repurchase Price = Original Selling Price + Interest

Original Selling Price = Sales Cost of Security

n = Number of Days to Maturity

What Are The Current Repo Rate And Bank Rate in 2023?

On February 8, 2023, the MPC (Monetary Policy Committee) increased the repo rate in India by 0.25%, making it 6.50%. Earlier, the MPC also increased the repo rate on December 7, 2022, to 6.25%. The current bank rate stands at 5.15%.

What is the repo rate today? What is the current bank rate?




a.) How do these rates reflect economic conditions

The central bank must maintain a certain level of liquidity and stability in the banking system. It uses several tools to achieve that goal, including adjusting the repo bank and bank rate. These crucial rates dramatically affect macroeconomics, including consumer borrowing and lending. The increasing repo and bank rates reflect increasing inflation rates, which the RBI wants to control by revising its repo and bank rates on the upper side.

b.) Implications for Borrowers and lenders

When the RBI increases the repo and bank rates, borrowing loans become costlier for commercial banks, which they compensate for by increasing the loan interest rate from borrowers. When we look at repo rate vs interest rate, we see that lending and borrowing become costlier when these rates rise, and people think many times before borrowing loans.

c.) Factors influencing changes in repo and bank rates

Demand and supply of money in the economy, fiscal deficit, government borrowing, inflation rates, global interest rates, and foreign exchange rates influence changes in repo and bank rates.

Also Read- What is the Impact of Repo Rate on Home Loans in India?


FAQs About Bank Rate and Repo Rate

1. How do changes in the bank rate affect the economy?

Changes in the bank rate affect cash flow in the economy. When the bank rates increase, fewer people borrow money due to increased interest rates, thus curbing inflation.

2. What is the reverse repo rate?

The reverse repo rate is when the central bank borrows money from commercial banks.

3. The Key difference between repo rate and reverse repo rate

The repo rate is the rate at which banks borrow from the RBI, while the reverse repo rate is the rate at which the RBI borrows from commercial banks.

4. What is the formula for the repo rate?

The formula for repo rate calculation is:

Repo Rate = (Repurchase Price – Original Selling Price / Original Selling Price) * (360 / n)

5. What is the current reverse repo rate?

The current reverse repo rate in India is 3.35%.

6. How often do central banks change the bank and repo rates?

There is no fixed time to change the bank and repo rates. The RBI changes it whenever it wants to curb or boost economic inflation.

7. Who sets the bank rate and repo rate in a country?

The Monetary Policy Committee (MPC) sets India's bank and repo rates. It is a committee that the Central Government constituted, and the RBI Governor is its leader.

8. When does the repo rate decrease?

The repo rate will decrease when the inflation rates come down, and the RBI wants to increase market liquidity.

9. When does the repo rate Increase?

The repo rate will increase when the inflation rates soar high, and the RBI wants to curb inflation by reducing cash flow in the market.

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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.