Through the ups and downs of this pandemic, the Indian economy has definitely seen some uncertain days. The impact of the first wave was more due to the surprise element of the pandemic. The overall impact of the second wave on the economy was far more controlled – thanks to the invaluable experience gained over the year and to the rising number of vaccinations, things look brighter today. Most sectors are in the ongoing process of recovery and are progressing slowly but steadily. It is a calculated prediction that India might undergo inflation in the last quarter of the financial year making this the right time to invest in real estate as it does quite well during inflation.
About Repo Rate
In order to borrow money from the bank, the transaction is executed by adding interest on the principal amount and this is mentioned because of the cost of credit. Similarly, when banks borrow money from RBI during a cash crunch, they’re required to pay certain interest to the financial institution which is known as the repo rate. An agreement to repurchase the securities at a predetermined price will be in place. So, the rate at which the commercial banks borrow money by selling their securities to the financial organization of a country (RBI) in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation and maintain liquidity in the case of a shortage of funds.
Difference between Repo Rate and Bank Rate
Repo Rate and Bank Rate are the two rates calculated for the borrowing and lending activities carried on by commercial and between central banks. Repo Rate is the charge for repurchasing the securities that had been sold by the commercial banks to the RBI
- Bank Rate is levied against loans provided by the central bank to commercial banks
- No collateral is involved while levying the Bank Rate
- Securities, bonds, agreements, and collateral is involved when Repo Rate is charged owing to the size of the transactions
- Repo Rate is always lower than the Bank Rate due to the massive difference between the loan amounts
- An increase in Bank Rate has a direct effect on the lending rates that are offered to the customers and restricts people to avail loans while damaging the overall economic growth
- Increase in Repo Rate is directly handled by the banks and doesn’t really affect any customers directly.
- Bank Rate caters to the long-term financial requirements of commercial banks
- Repo Rate mainly focuses on short-term financial needs like shortage of funds
Bank Rates and Repo Rates have their own specific differences but it doesn’t change the fact that both are powerful tools used by the central banks (in this case RBI) to control liquidity, rate of inflation in the market and to regulate money supply in the market.
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