Difference Between Bank Rate and Repo Rate

14 Apr 2025

By: BlinkX Research Team

In India's financial system, the Bank Rate vs Repo Rate are two pivotal instruments employed by the Reserve Bank of India (RBI) to implement monetary policy. While both rates are integral to regulating liquidity and controlling inflation, they serve distinct purposes and have different economic implications. A clear understanding of these rates is essential for comprehending how the RBI steers the broader economy through monetary interventions.

What is Bank Rate?

The Bank Rate is the interest rate at which a nation's central bank lends money to domestic banks, typically for short-term purposes. It influences overall economic activity by affecting lending rates in the broader economy. A higher bank rate makes borrowing costlier, reducing spending and inflation. Conversely, a lower rate encourages borrowing and investment.

Table of Content

What is Bank Rate?
What is the Repo Rate?
What is the Difference Between Bank Rate vs Repo Rate?
Repo Rate Calculation
What are the Factors Affecting Bank Rate and Repo Rate?
Examples of Bank Rate and Repo Rate Changes

What is the Repo Rate?

The Repo Rate is the interest rate at which a country's central bank lends money to commercial banks, typically against government securities. It is a key tool used to control inflation and manage liquidity in the economy. When the repo rate rises, borrowing becomes more expensive, slowing down economic activity. Conversely, a lower repo rate encourages banks to borrow more, boosting spending and investment.

What is the Difference Between Bank Rate vs Repo Rate?

Aspect	Bank Rate	Repo Rate
Definition	The Bank Rate refers to the interest rate at which a central bank lends funds to commercial banks for longer-term periods.	The Repo Rate refers to the interest rate at which the central bank lends short-term funds to commercial banks, typically on an overnight basis.
Term	It typically applies to loans with maturities ranging from several months to multiple years.	Although generally associated with overnight lending, Repo Rate transactions can also extend over a few days, depending on liquidity requirements.
Monetary Policy Tool	The Bank Rate serves as a key instrument for regulating the overall money supply within the economy.	It plays a critical role in managing short-term liquidity and stabilizing the money market interest rates.
Influence on Banks	Adjustments to the Bank Rate tend to influence bank lending and deposit rates indirectly and with a time lag.	Adjustments to the Repo Rate tend to have an immediate and direct effect on commercial banks' lending and deposit rates.
Lending Purpose	Commercial banks borrow from the central bank at the Bank Rate for various purposes, including fulfilling reserve requirements.	Commercial banks rely on borrowing at the Repo Rate from the central bank to address short-term liquidity needs and meet statutory reserve requirements.
Duration of Loans	Due to the longer maturities associated with Bank Rate lending, these funds are well-suited for extended financing needs.	These borrowings are of very short durations, making them suitable for resolving immediate and temporary liquidity mismatches.
Role in Inflation Control	By influencing long-term interest rates and economic activity, the Bank Rate plays an indirect role in managing inflation.	Changes in the Repo Rate have a swift impact on short-term interest rates and can influence inflation expectations more directly.
Liquidity Management	The Bank Rate is not primarily intended for addressing short-term liquidity needs in the financial system.	The Repo Rate serves as a key instrument for managing short-term liquidity in the financial system and ensuring adequate cash flow within the banking sector.
Frequency of Review	Changes to the Bank Rate are generally infrequent and typically occur as part of broader monetary policy assessments.	It is typically reviewed more frequently to reflect evolving short-term macroeconomic conditions and liquidity dynamics.
Impact on the Bond Market	Adjustments in the Bank Rate can impact long-term bond yields and the broader bond market, although the effects are often delayed.	Modifications to the Repo Rate usually influence short-term bond yields and money market instruments more quickly and significantly.

Repo Rate Calculation

Commercial banks are required to maintain a standardized interest rate, known as the repo rate. This rate is determined through mutual agreement and reflects the interest charged by the central bank when lending funds to commercial banks or the interest paid to them when they deposit surplus funds with the Reserve Bank of India (RBI). The calculation of the repo rate is based on the following mathematical formula:

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

Here,

Repurchase Price = Original Selling Price + Interest

Original Selling Price = Sales Cost of Security

n = Number of Days to Maturity

What are the Factors Affecting Bank Rate and Repo Rate?

The below information explains the factors affecting the Bank Rate and Repo Rate:

Inflation Levels: When inflation is high, the central bank may increase rates to reduce the money supply and control prices.

Economic Growth: Lower rates may be used to make borrowing cheaper and encourage spending and investment to boost economic growth.

Liquidity in the Banking System: If there is excess liquidity, the central bank might raise rates; if there's a shortage, it may lower them to help banks lend more.

Government Borrowing Needs: High government borrowing can push the central bank to adjust rates to manage debt levels and maintain fiscal balance.

Foreign Exchange Rates and Capital Flows: To manage exchange rate stability and attract foreign investment, the central bank may tweak rates accordingly.

Global Economic Conditions: Changes in global interest rates, especially by major economies like the US, can influence domestic rate decisions.

Examples of Bank Rate and Repo Rate Changes

The Bank Rate is the interest rate at which the central bank (like RBI in India) lends money to commercial banks without any security.
Repo Rate is the rate at which the central bank lends money with a repurchase agreement (banks sell securities and agree to buy them back).
Example of Bank Rate: If RBI sets the bank rate at 6%, a bank borrowing ₹1 crore will repay ₹1.06 crore.
Example of Repo Rate: If the repo rate is 5.5%, the bank pays ₹5.5 lakh interest on ₹1 crore, using government bonds as collateral.

Conclusion

The bank rate refers to the interest rate at which a country's central bank lends funds directly to commercial banks without requiring any collateral. In contrast, the repo rate is the rate at which the central bank lends money to commercial banks against government securities as collateral.

Fluctuations in these rates can have a significant impact on financial markets, including interest rates for loans and investment returns—factors closely monitored by investors using a stock market trading app to make informed trading decisions.

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FAQs on Difference Between Bank Rate and Repo Rate

How do changes in the bank rate affect the economy?

A higher bank rate makes borrowing costlier, slowing spending and inflation. A lower rate encourages borrowing and investment, boosting economic activity.

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

Central banks typically review rates during scheduled policy meetings, often quarterly or bi-monthly. However, they may adjust rates anytime if economic conditions demand urgent action.

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

These rates are set by a country's central bank (e.g., the RBI in India or the Fed in the U.S.). A monetary policy committee or board usually makes the decision.

How does the repo rate affect the stock market?

A lower repo rate can boost markets by reducing borrowing costs and increasing liquidity. A higher rate may lead to market declines as it tightens liquidity and raises costs.