Question

Which of the following statements are correct?

1. No collateral or the repurchase agreements are involved while charging Bank Rate.

2. Repo Rate is always lower than the Bank Rate.

3. An increase in Bank Rate directly affects the lending rates offered to the customer, whereas an increase in Repo Rate is usually doesn’t affect customers directly.

4. Only the repo rate is used by the RBI to control the liquidity in the market.

Select the correct option using the options given below:

(a) 1, 2, 3, and 4
(b) 1 and 2 only
(c) 1, 2, and 3 only
(d) 1, 3 and 4 only

Answer 1

Answer

b) 1 and 2 only

Answer 2

Option C - 1, 2 and 3 only

More Information

■ Repo Rate and Bank Rate :-

While both rates are short term tools used to control the cash flow in the market and are often mistaken to be one and the same, there is some noteworthy difference between the two.

Key differences between Repo Rate vs Bank Rate :-

• Bank Rate is charged against loans offered by the central bank to commercial banks, whereas, Repo Rate is charged for repurchasing the securities sold by the commercial banks to the central bank.

• No collateral is involved while charging Bank Rate but securities, bonds, agreements, and collateral is involved when Repo Rate is charged.

• Repo Rate is always lower than the Bank Rate.

• An increase in Bank Rate directly affects the lending rates offered to the customer, restricting people to avail loans and damages the overall economic growth, whereas an increase in Repo Rate is usually handled by the banks and doesn’t affect customers directly.

• Comparatively, Bank Rate caters to long term financial requirements of commercial banks whereas Repo Rate focuses on short term financial needs.

• Though Bank Rate and Repo Rate have their own differences, both are used by RBI to control liquidity and inflation in the market. In a nutshell, the central bank uses these two powerful tools to introduce and monitor the liquidity rate, inflation rate and money supply in the market.

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