Bank Rate: Notes for UPSC Indian Economy

Bank rate is the rate of interest which is charged by a central bank while lending loans to a commercial bank. The event of a fund deficiency, a bank can borrow money from the central bank of a country. In India’s case that would be the Reserve Bank of India. The borrowing is done as per the basis of the monetary policy of that country.

Bank Rate is a featured concept in the economy segment of the IAS exam.

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What is a Bank Rate?

Bank rate is a rate at which the Reserve Bank of India (RBI) provides the loan to commercial banks without keeping any security. There is no agreement on repurchase that will be drawn up or agreed upon with no collateral as well. The RBI allows short-term loans with the presence of collateral. This is known as Repo Rate. Bank Rates in India is determined by the RBI. It is usually higher than a Repo Rate on account of its ability to regulate liquidity.

How is a Bank Rate determined?

The interest rate is charged by a nations central financial authority that controls the money supply in the economy as well as the banking sector. This is usually done quarterly in order to stabilise inflation and control the country’s exchange rates.

When a bank rate changes it triggers a domino effect that influences every sphere of a country’s economy. For example prices in stock market change due to fluctuations in interest rate changes. A change in bank rate affects customers as it affects the rates at which they can take loans

To know more about inflation targeting, visit the linked article.

What is the Bank Rate in India?

As mentioned before, the Reserve Bank of India determines the bank rate. The rate is changed from time to time but it does not mean that there is already a set schedule for it. The rate at which the repo rates are changed depends entirely on the prevailing economy.

As of May 2020, the Bank Rate is 4.25% the Repo Rate is 4.00% and Reverse Repo Rate is 3.75%.

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Relevant Question Regarding Bank Rate

What is the difference between bank rate and repo rate?

Bank Rate and REPO rate are almost similar in nature. The central bank(RBI for India) lends money to a private bank for which the private bank needs to pay the interest rate. The only difference is that the REPO rate is used to lend money for the short term while the bank rate for the long term.

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