Bank rate Vs repo rate
Repo Vs variable rate repo
RBI determined rates - key difference
Bank Vs Repo rate difference:
Though both Bank rate & repo rate are determined by RBI at which commercial banks/financial institutions can borrow money from RBI.
The difference is that,
- Repo rate connected borrowing needs collateral - RBI lends money at repo rate only if collateral (Securities, bonds, and agreements) is offered & is cheaper/lower than bank rate. RBI lending at bank rate is without collateral and costlier/ higher than repo rate.
- Repo rate connected borrowing is for shorter period - Money borrowed at repo rate is generally for a shorter period as against Money borrowed at bank rate.
- Bank rate borrowing reflects market sentiment - Since, bank rate borrowing is for a fairly longer period in comparison to the one borrowed at repo rate, it has an impact on overall lending & borrowing
Variable Rate Repo (VRR) Auction
Bank variable rate repo (VRR) auction:
What is VRR auction?
Reserve Bank of India’s (RBI) uses variable rate repo (VRR) auction to infuse or suck out liquidity as per the demand of the market to maintain price stability and at the same time provide adequate liquidity to provide for conditions for optimum growth, employment &investment.
Why would RBI want to reduce liquidity?
To control inflation.
How can RBI reduce liquidity?
In case the RBI wants to reduce liquidity it can borrow money from banks via a general auction, process of bidding is applied where individual banks put proposals regarding how much they want to lend at what rates.
Normally rates offered by banks will be higher than repo rate.
Why would RBI want to increase liquidity?
To provide for more investment, which can further lead high growth, rate of interest, jobs & high money supply
How can RBI increase liquidity?
RBI can increase liquidity in the banking system by simply lending more money to liquidity deficit banks. Since the money offered is less than the amount, demanded by banks, process goes through auction, where high bidders in terms of interest rate offered get the most out of the offered amount.