In India’s financial and banking ecosystem, two terms often dominate the discussion whenever the Reserve Bank of India (RBI) announces its monetary policy — Bank Rate and Repo Rate. These rates play a crucial role in controlling inflation, regulating money supply, influencing loan interest rates, and guiding overall economic stability.
However, for many customers and even new banking professionals, these terms may sound similar. While both are RBI-managed policy rates, they differ significantly in purpose, usage, and impact.
This article analyse the meaning, purpose, differences and real-life impact of Bank Rate vs Repo Rate:
What is the Bank Rate?
The Bank Rate is the interest rate at which the RBI lends money to commercial banks without any collateral. It is mostly used for long-term lending and serves as a benchmark for long-term interest rates in the economy.
Key Features of Bank Rate
- It is used for long-term loans and advances given by RBI to banks.
- No collateral or government securities are required.
- It influences long-term lending rates across the financial system.
- Higher bank rate → Higher borrowing cost for banks → Higher loan interest rates for customers.
When is the Bank Rate Used?
The bank rate is specifically used for:
- Penal interest for banks failing to maintain CRR/SLR
- Long-term liquidity support
- Signaling long-term monetary stance
Example: If RBI increases the bank rate from 6% to 6.5%, banks will borrow at a higher cost and may increase long-term loan rates like home loans.
What is the Repo Rate?
The Repo Rate (Repurchase Rate) is the interest rate at which the RBI lends short-term funds to commercial banks against government securities (collateral). It is one of India’s most important monetary policy tools.
Key Features of Repo Rate
- It is used for short-term borrowing, usually overnight.
- Banks must provide government securities as collateral.
- Helps control inflation and short-term liquidity.
- Directly impacts EMIs on home loans, car loans, and personal loans.
When is the Repo Rate Used?
The Repo Rate is used for:
- Regulating short-term liquidity
- Controlling inflation
- Influencing short-term interest rates
- Managing temporary cash shortages of banks
Example: If RBI cuts repo rate from 6.5% to 6.25%, banks get funds cheaply and may reduce loan EMIs.
Bank Rate vs Repo Rate: Key Differences
Here is a clear and simple comparison:
| Parameter | Bank Rate | Repo Rate |
| Definition | Rate at which RBI lends long-term funds without collateral | Rate at which RBI lends short-term funds with collateral |
| Collateral Required | No | Yes (Government Securities) |
| Purpose | Long-term monetary stability, penal rates | Short-term liquidity control, inflation management |
| Impact on Economy | Affects long-term interest rates | Affects short-term loan EMIs |
| Tenure of Lending | Long-term | Short-term / overnight |
| Use Case | Penal rates, long-term lending | Controlling inflation, daily liquidity issues |
| Change Frequency | Not changed very frequently | Reviewed every 2 months at MPC meeting |
| Influence on Loans | Long-term loans | Home loans, personal loans, auto loans |
How RBI Uses Repo Rate and Bank Rate to Manage the Economy
1. Controlling Inflation
- When inflation rises, RBI increases the repo rate. Borrowing becomes costlier → Money supply reduces → Inflation cools down.
- Bank rate changes may also signal long-term approach, but repo rate is the primary tool for inflation control.
2. Managing Liquidity
- High repo rate → Banks borrow less → Liquidity reduces.
- Low repo rate → Banks borrow more → Liquidity increases.
Bank rate has a limited role here as it is rarely used for day-to-day liquidity.
3. Influencing Loan EMIs
Because banks benchmark many retail loans to repo-linked lending rates (RLLR), an increase or decrease in repo rate directly changes EMIs.
Bank rate changes normally affect long-term corporate borrowing or bank penalties.
Why Repo Rate is More Important Today
In recent years, RBI has made the repo rate the main monetary policy tool for daily operations.
Reasons:
- It directly affects customer EMIs
- It helps quickly control inflation
- It aligns with modern global monetary frameworks
- RLLR (Repo-Linked Lending Rate) ensures faster transmission to customers
Even though bank rate still exists, its influence is comparatively lower in modern banking operations.
Which One Has a Bigger Impact on You?
Repo Rate Affects You More Directly
Because:
- Home loans
- Car loans
- Personal loans
- Business loans
are linked with repo rate.
A repo rate hike means:
- Higher EMI
- Higher interest burden
- Reduced loan demand
A repo rate cut means:
- Lower EMI
- More liquidity
- Higher borrowing activity
Bank Rate Affects the Overall System
It has an indirect impact on:
- Long-term lending environment
- Bank funding cost
- Corporate loan interest rates
But it does not directly change your monthly EMIs.
Conclusion
While both bank rate and repo rate are policy rates used by RBI, their purpose and impact differ sharply.
- Bank Rate is for long-term lending without collateral and influences long-term interest rates.
- Repo Rate is for short-term lending with collateral and impacts everyday EMIs, inflation, and liquidity.
In today’s economic environment, Repo Rate is the more powerful and widely-used tool for monetary policy transmission. Understanding these rates helps customers, investors, and professionals interpret RBI’s monetary decisions more accurately.
