WHAT IS DIFFERENCE BETWEEN BANK RATE & REPO RATE
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Answer Posted / bloody idiot
A Bank has to keep/maintain 5% of its DTL in Cash form with
RBI. Similarly it maintains 25% (present) of its DTL in the
form of Govt. Bonds,secs with RBI.
REPO (Repurchase Option)
When Banks have shortage of funds to meet their lending and
operational task daily, they can exercise the Repo Window
and borrow from RBI against the GSecs (RBI repurchases the
GSecs thats why it is called REPO). Even if this is the
case RBI levies interest(Discount for buying back) on such
REPO lending and this is called REPO Rate.
Bank Rate
It is the rate which RBI charges while lending money to
Commercial Scheduled Banks.It is the ineterst rate payable
by Banks on ST borrowings from RBI. This influences LT
Lending rates of Commercial Banks as well since the Banks
try to recover the money lost due to hike in Interest rates
by recovering it from it's customers (Borrowers) thereby
increasing Interest Rates.
This can have serious impact on the money supply in the
Market since when Interests rates increase, Borrowers seek
other options of raising funds and thus Bank Lending (which
forms substantial shunk of Money supply - Money Market)
contracts thereby reducing the overall flow of money in the
Economy.
This can have distinct relation to Inflation also as a
reduction in money supply can reduce consumption and Demand
thereby reducing inflation.
RBI uses these measures to control Money Supply.
| Is This Answer Correct ? | 13 Yes | 5 No |
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