What is the Bank Rate?

By : Neha Dhyani

Updated : May 17, 2022, 9:41

Bank Rate is the interest rate of financial institutes at which India's central bank, the Reserve Bank of India (RBI), provides loans to domestic or commercial banks. Usually, the RBI gives short-term loans to commercial banks without requiring them to keep collateral and purchasing security. The commercial banks also don't need to repurchase agreements when borrowing loans from the central bank at the Bank Rate.

Bank Rate - Overview

Bank Rate and Marginal Standing Facility (MSF) rate have a link, and when the MSF rate changes, so do the Bank Rate. The Reserve Bank of India decides the Bank Rate. This rate is slightly higher than Repo Rate.

The RBI, in its monetary policy review, determines the Bank Rate based on the entire situation of the overall economy. The Reserve Bank of India lends large funds to commercial banks at this rate.

About Bank Rate in India

As of the December 2021 monetary policy, the latest Bank Rate from RBI is 4.25%. The RBI determines this rate and other rates such as Repo Rate and Reverse Repo Rate. The current Repo Rate is 4.00%, and the Reverse Repo Rate is 3.35%. These rates may change due to changes in the MSF rate and prevailing economy from time to time.

Impact of the Bank Rate

The Bank Rate depends on the MSF rate, and when the Reserve Bank of India increases the Bank Rate, the commercial bank borrows the funds at a higher price and reduces the credit volume. When the Bank Rate rises, banks experience a decline in the money supply.

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Major Difference Between the Bank Rate and Repo Rate

The significant difference between the Bank Rate and Repo Rate is that Bank Rate directly impacts customers since it impacts long-term funds lending. In contrast, Repo Rate doesn't impact the customer directly. The RBI applies Repo Rate to the repurchase of securities sold by commercial banks and the Bank Rate to loans that the RBI gives to commercial banks.

The Repo Rate is lower than the Bank Rate due to the collateral and repurchase obligation. The RBI provides Repo Rate on short-term financial lending to banks while Bank Rates issues to long-term requirements of domestic banks.

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Why is the Bank Rate in the News?

The RBI, in its Monetary Policy Committee (MPC) recently, kept the key policy rates, including Repo Rate, Bank Rate, and Reverse Repo Rate, unchanged. It was the tenth consecutive time in which Bank Rates remained unchanged. As of May 22, 2020, the Bank Rate is 4.25%.

These rates are more likely to rise due to the current inflation level.

The Bank Rate is the central bank's interest rate when a financial institution borrows money from them. When banks are unable to reserve requirements and preserve liquidity, it goes to central banks for loans.

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FAQs on Bank Rate

Q1) What is the Bank Rate?

The Bank Rate is the interest rate of financial institutes at which India's central bank, the Reserve Bank of India (RBI), provides loans to domestic or commercial banks.

Q2) Who Determines the Bank Rate?

The Reserve Bank of India decides the Bank Rate. This rate is slightly higher than the Repo Rate.

Q3) What is the Bank Rate in India?

As of December 2021 monetary policy, the latest Bank Rate from RBI is 4.25%.

Q4) What is the Impact of the Bank Rate?

The Bank Rate depends on the MSF rate, and when the Reserve Bank of India increases the Bank Rate, the commercial bank borrows the funds at a higher price and reduces the credit volume.

Q5) What is the Major Difference Between the Bank Rate And Repo Rate?

The significant difference between the Bank Rate and Repo Rate is that Bank Rate directly impacts customers since it impacts long-term funds lending. In contrast, Repo Rate doesn't impact the customer directly.