Difference between a bank rate and a REPO rate with respect to RBI

Repo rate : The commercial Bank sells the security to RBI to raise money. When banks sell security , banks promise to buy back the same security from RBI at a predetermined date with an interest at the repo rate .

Think of it in this way:

I want ₹100 to buy my favourite toy at the local toy store.But I don’t have that kind of cash on me. So I go to my friend who agrees to lend me the required amount but he wants some sort of collateral so that he’s assured that I will pay him back. So I give him a toy i have currently and he lends me the money. Later I repay him the money with some interest to compensate for the risk that he undertook by lending me cash and I buy back my toy. So this interest rate is called Repo rate. It is basically a repurchase argument.

Reverse Repo Rate : This is the same thing as the above,except that in this case it is the Commercial bank that gives surplus cash that exists with them to the RBI and the RBI later gives it back with some interest and that interest rate is called the Reverse repo Rate.

Bank Rate : Bank rate is the rate at which RBI lends money to commercial banks without selling or buying any security.This is generally a last resort method and hence no collateral is required.Resorting to the same example as above,what if I didn’t have a toy with me currently and still needed the money?So my friend still lends me the cash but now demands a higher interest to compensate for the higher risk as he has no collateral with him!

Generally the bank rate is 100 basis points above the repo rate.Similarly the repo rate is 100 basis points above the reverse repo rate.This isn’t a rule,but is generally the case.

The other differences include that the Repos are generally for short term period while the money is borrowed at the bank rate for a longer period of time.The bank rate is always higher than the repo rate in the country.

The repo rate and the reverse repo rate are important tools for controlling inflation in the country.

RBI Bank Rates in Indian Banking - 2018

Latest RBI Bank Rates in Indian Banking - 2018

SLR Rate	CRR	MSF	Repo Rate	Reverse Repo Rate	Base Rate
19.5%	4%	6.5%	6.25%	6%	8.65% - 9.45%

RBI Repo Rate Trend Chart

Repo rate also known as the benchmark interest rate is the rate at which the RBI lends money to the banks for a short term. When the repo rate increases, borrowing from RBI becomes more expensive. If RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate similarly, if it wants to make it cheaper for banks to borrow money it reduces the repo rate. Current repo rate is 6.25%

Reverse Repo rate is the short term borrowing rate at which RBI borrows money from banks. The Reserve bank uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the banks will get a higher rate of interest from RBI. As a result, banks prefer to lend their money to RBI which is always safe instead of lending it others (people, companies etc) which is always risky. 

Repo Rate signifies the rate at which liquidity is injected in the banking system by RBI, whereas Reverse Repo rate signifies the rate at which the central bank absorbs liquidity from the banks.

CRR - Cash Reserve Ratio - Banks in India are required to hold a certain proportion of their deposits in the form of cash. However Banks don't hold these as cash with themselves, they deposit such cash(aka currency chests) with Reserve Bank of India , which is considered as equivalent to holding cash with themselves. This minimum ratio (that is the part of the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or Cash Reserve Ratio.

When a bank's deposits increase by Rs100, and if the cash reserve ratio is 9%, the banks will have to hold Rs. 9 with RBI and the bank will be able to use only Rs 91 for investments and lending, credit purpose. Therefore, higher the ratio, the lower is the amount that banks will be able to use for lending and investment. This power of Reserve bank of India to reduce the lendable amount by increasing the CRR, makes it an instrument in the hands of a central bank through which it can control the amount that banks lend. Thus, it is a tool used by RBI to control liquidity in the banking system.


SLR - Statutory Liquidity Ratio - Every bank is required to maintain at the close of business every day, a minimum proportion of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and un-encumbered approved securities. The ratio of liquid assets to demand and time liabilities is known as Statutory Liquidity Ratio (SLR). RBI is empowered to increase this ratio up to 40%. An increase in SLR also restricts the bank's leverage position to pump more money into the economy.

Net Demand Liabilities - Bank accounts from which you can withdraw your money at any time like your savings accounts and current account.
Time Liabilities - Bank accounts where you cannot immediately withdraw your money but have to wait for certain period. e.g. Fixed deposit accounts. 

Call Rate - Inter bank borrowing rate - Interest Rate paid by the banks for lending and borrowing funds with maturity period ranging from one day to 14 days. Call money market deals with extremely short term lending between banks themselves. After Lehman Brothers went bankrupt Call Rate sky rocketed to such an insane level that banks stopped lending to other banks.


MSF - Marginal Standing facility - It is a special window for banks to borrow from RBI against approved government securities in an emergency situation like an acute cash shortage. MSF rate is higher then Repo rate. Current MSF Rate: 6.5%


Bank Rate - This is the long term rate(Repo rate is for short term) at which central bank (RBI) lends money to other banks or financial institutions. Bank rate is not used by RBI for monetary management now. It is now same as the MSF rate. Current bank rate is 6.5%