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.
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