Banking Rates: Repo Rate, Bank Rate & Base Rate
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Consider a situation where John's bank doesn't have enough money to give out loans or handle it's daily expenses.
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web story (1)
In this situation, the bank asks RBI (Reserve Bank of India) for some funds in return of securities or bonds.
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Since the bank has enough funds now, it gives out loans to people in need.
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These loans charge an interest rate greater than the Repo Rate. This way the bank starts earning money.
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Therefore, in a way the RBI controls the amount that is there in the economy.
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The minimum rate of interest charged by the bank to the consumer is known as the Base Rate. (decided by the bank itself)
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But if there's no involvement of securities or bonds, then the rate is called as Bank Rate.
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Bank Rate is usually higher than the Repo Rate. It is an important tool to control liquidity.
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