Bank Rate: Definition, Calculation and Rates in India

All commercial banks and lending institutions are required to keep certain standards regarding cash reserve, liquidity, and interest rates. These standards are generally met with the help of commercial loans from the central bank. The central bank offers loans with and without collateral to enable such requirements. When banks borrow without collateral, they are essentially taking a loan at bank rates, and when there is collateral involved, they are borrowing with a repo rate. Furthermore, there are tools such as marginal standing facility and standing deposit facility, which allows banks to moderate their cash requirements with the central bank. All these facilities involve standard bank rates decided by the Reserve Bank of India. In this piece, read about the prevailing bank rates, bank repo rates, historical repo rates, and much more. 

What is a Bank Rate?

Bank rates, termed key policy rates initially, primarily determined how the market would function in terms of interest rates. Currently, the central banks mostly mark repo rates as a market price standard and not the bank rate itself. This is primarily because bank rates are used for collateral-free lending. However, there are two major reasons why bank rates are still around. Firstly, bank rates can be used as discount rates, which translates to banks reaching out to the central bank for loans with a discounted rate and without any collateral involved. Mostly, banks consider taking loans to meet their minimum cash reserve requirements. For these, banks incorporate the use of commercial bills and treasury bills and cash them at discounted rates. Secondly, bank rates can also be charged as a penalty rate. This is important because when banks cannot meet their SLR or CRR, the central bank imposes penal charges applicable as per the prevailing bank rate. 

How is a Bank Rate Determined?

In the current scenario, the repo rate, which can be said to be the present-day key policy rate, has become a medium for the central bank to manipulate inflation by increasing the repo rate. This eventually is taken as a communication by the banks to increase their interest rates. Consequently, consumers will have lower demand for loans which translates to lower demand for commodities. As a result, the inflation rate is controlled on a large scale. Thus, it can be said that the significance of bank rates has been overshadowed by the idea of a repo rate, as the prevailing bank interest rates are deduced from the repo rates only. 

Bank Repo Rate History

The Bank Repo Rate is majorly decided by the Monetary Policy Committee (MPC) of the Reserve Bank of India. Repo rates provide a standard with which commercial banks adjust their lending rates. The bank repo rates have constantly fluctuated between 4% and 9%. The highest repo rate was set in July 2008. The increase in the bank repo rate was to curb the problem of inflation. This was the year when the world suffered a mass recession, after which prices rose. However, the lowest bank repo rate was set during the year 2020. Given below is a table representing the history of bank repo rates. The data given is shown from the year 2005 to the year 2022. 

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What is the Current Bank Repo Rate?

Currently, as of September 2022, the bank repo has been prevailing at the rate of 5.90%. There has been a 0.50% increase in the bank rate. This, as a result, will transfer the trend to each bank in terms of their lending rate. The table below shows some of the prevailing rates for the Standing Deposit Facility Rate, Marginal Standing Facility Rate, Bank Rate, and Fixed Reversed Repo Rate. 

FAQ’s about Bank Rate