Friday, 20 July 2012

What is Bank Rate, Repo Rate and Reverse Repo Rate?


What is Bank Rate?
The bank rate is the rate at which the central bank gives credit to the commercial banks. The market rate of interest is directly proportional to the bank rate. Market rate of interest refers to the rate of interest which a commercial bank charges from customers (who take loans). During inflation, the cost of capital is increased by increasing bank rate. This reduces the amount of money in the market because it becomes expensive to take loans and people refrain from it. During deflation, cost of capital is reduced so as to encourage people to take loans and this increases the flow of credit.

What is Repo rate?
Repo rate refers to the bank rate at which central bank of the country (Reserve Bank of India in India) offers loans to the commercial banks.

What is Reverse Repo rate?
Reverse Repo rate refers to the rate of interest which central bank of country pays to the commercial banks when commercial banks keep their money with the central bank.

Both Repo rate and Reverse Repo rate are decided by central banks and revised from time to time depending on the market and economic scenario of the country.

Bank Rate, Cash reserve ratio, and Statutory Liquidity Ratio are referred to as quantitative instruments of credit control because these instruments decide the amount of cash flowing in the market.

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