The bank rate is the rate of interest at which a central bank lends money to commercial banks. It is also known as the discount rate. The bank rate is an important tool for the central bank to manage the money supply and interest rates in the economy.
When the central bank raises the bank rate, it makes it more expensive for commercial banks to borrow money. This, in turn, makes it more expensive for businesses and individuals to borrow money, which slows down the economy. When the central bank lowers the bank rate, it makes it cheaper for commercial banks to borrow money, which stimulates the economy.
The bank rate is different from the repo rate. The repo rate is the rate at which the central bank lends money to commercial banks by buying securities. The repo rate is typically lower than the bank rate because it is secured by collateral.
In India, the bank rate is set by the Reserve Bank of India (RBI).
Differences between the bank rate and the repo rate:
| Feature | Bank Rate | Repo Rate |
|---|---|---|
| Definition | The rate at which a central bank lends money to commercial banks without collateral. | The rate at which a central bank lends money to commercial banks by buying securities. |
| Typically higher or lower | Higher | Lower |
| Purpose | To manage the money supply and interest rates in the economy. | To provide liquidity to the banking system. |
| Collateral | No | Yes |