Difference Between Bank Rate and Repo Rate
Bank Rate vs Repo Rate
Bank rate and repo rate are two financial terms associated with lending or borrowing money from a central or national bank. In a broad scope, both rates are involved in transactions between a central or national bank and a commercial or domestic bank.
Bank rate is also known as discount rate. This type of rate is used when a commercial bank tries to secure a loan or any type of advances from the central bank. A reason a commercial bank may borrow is the imminent shortage of funds within the bank.
Bank rates have a direct impact on lending rates by a commercial bank to its clients. If there is a high bank rate from the national bank to a commercial bank, the lending rate of the commercial bank is also very high. This lending rate passes down to the clients. The same is true when the national bank offers a low bank rate.
As well, a bank rate is a method used by central banks to regulate the currency supply for the country’s economy and in the banking sector. If there is a high unemployment rate, the national bank can lower the bank rate so that the commercial banks are able to offer a lower lending rate to those who would like to procure a loan. Collaterals are not involved in this transaction.
On the other hand, repo rate is also a relative term to bank rate. It is also known as repurchasing rate. Repurchase rate occurs in a banking transaction called a repurchase agreement. A repurchase agreement involves a commercial bank buying securities from the national bank. However, the national bank will repurchase the securities at a set date and price. The rate, specifically the interest rate, for repurchasing these securities is called repo or repurchase rate.
The repo rate is a method to control the currency supply to the economy. If the repo rate is low, the monetary system expands and banks receive the funding at a cheaper price. In contrast, if the repo rate is high, the currency supply contracts, which could cause a shortage on borrowing.
The repurchase agreement enables the holder of securities to raise funds by selling them and repurchasing them at a later date. Collateral is used in this agreement – the securities. The repo rate can serve as the profit from selling the securities.
- Two parties are constantly involved in bank and repo rates – the national bank and the commercial bank. Both undergo transactions between both banks. Both repo rates and bank rates help to raise funds, usually in favor of the commercial bank.
- As their name implies, both are classifications of borrowing rates from the national bank on behalf of the commercial bank. In addition, both are considered methods to control the currency supply for the economy and the banking sector.
- Bank rate is also known as discount rate. In contrast, repo rate is also called repurchase rate.
- The bank rate involves loans while the repo rate involves securities. Also, bank rate doesn’t involve collateral of any kind while the repo rate (especially the repurchase agreement) requires the securities as the collateral in the agreement.
- The bank rate is usually higher compared to the repo rate
- Usually, bank rate also affects the lending rate of the commercial bank. A high bank rate will reflect in the high lending rate of the commercial bank to its clients. On the other hand, the repo rate is not passed to the clients of the commercial bank.
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