Repo Rate, Reverse Repo Rate and Bank Rate: Meaning

Repo Rate or Repurchase rate:

The rate, at which the banks borrow money from the Reserve Bank of India (RBI) to meet their short term needs, is known as Repo or Repurchase rate. The banks deposit their bonds to RBI as security against borrowing money. This rate is usually less than the prevailing interest rate. Therefore, when the RepoRate is increased, borrowing money from RBI becomes more expensive and, on the contrary, with decrease in repo rate, the borrowing becomes cheaper.

Reverse Repo rate:

The rate, at which the Reserve Bank of India (RBI) borrows money from the banks, is known as Reverse RepoRate. The reverse repo rate usually controls the excess money floating in the banking system. This rate is usually greater than the prevailing interest rate. Consequently, the Banks prefer to keep their money with the RBI, not to the customer.

Bank rate or Discount rate:

The rate, at which the central bank (i.e. RBI in India) lends money to the National banks, is known as Bank rate also called discount rate. It is a tool used to control  money supply in both country’s economy and the banking sector. If any indication about the increase in Bank rate by the central bank comes, it gives clear indication that banks will also increase deposit rate. When the Bank rate increases, the attractiveness to borrow money by the commercial banks decreases and on the contrary when the Bank rate decreases, the attractiveness to borrow money by the commercial banks increases.

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