Usually, when someone hunts for a home loan to buy a house, the primary focus is on the interest rate. The home loan interest rate is the rate at which a homebuyer needs to pay interest to the lending institution. Thus, the higher the home loan interest rate is, the higher the amount one has to repay to the lender.
But most often, borrowers are unaware of the factors that lenders take into account for calculating home loan interest rates. Among several others, the two major components that determine home loan interest rates are ‘the bank rate and repo rate’.
Repo rate and bank rate are nothing but the rates at which the Reserve Bank of India (RBI) lends money to commercial banks and Non-Banking Financial Corporations (NBFCs) in the country. Although there are subtle differences between repo rate and bank rate, these two terms are often used interchangeably.
Through this article, one can get an insight into the intricate details of bank rate vs repo rate and understand how they affect home loan interest rates.
What are Repo Rates and Bank Rates?
Whenever commercial banks or NBFCs in India need money to manage their liquidity needs, they approach the RBI, which in turn, grants loans to them by levying a certain interest rate on the loan amount. This interest rate can either be the repo rate or the bank rate.
What are Repo Rate and Reverse Repo Rate?
If a loan is provided against a security or collateral, the interest rate levied by the RBI is known as the repo rate. In this case, the borrowing bank or NBFC is required to sell certain securities or bonds to the RBI with an agreement to repurchase them at a certain date in the future by paying a pre-determined price. This price is calculated as per the repo rate at which the money is being borrowed.
On the other hand, if a bank or NBFC has excessive funds, it can choose to deposit the same with the RBI and earn interest at the ‘reverse repo rate’. The difference between the repo rate and the reverse repo rate is that the former is levied on the borrowing bank while the latter is levied on the RBI itself.
What is the Bank Rate?
If a bank or NBFC doesn’t want to enter into a repurchasing agreement with the RBI, it can borrow money at the ‘bank rate’. In this case, the borrowing bank or NBFC is simply required to repay the loan amount to the RBI along with the accrued interest as per the applicable bank rate. Sometimes, the bank rate is also called the ‘discount rate’.
Repo Rate vs Bank Rate
The major difference between the bank rate and the repo rate is the involvement of collateral and the repurchasing agreement. However, the two terms are distinguishable on several other parameters as well.
The table below depicts a comparison of bank rate vs repo rate based on various factors:
| Parameter | Bank rate | Repo rate |
| Loan tenure | The tenure for loans taken at the bank rate can go up to 28 days | Loans taken at the repo rate are overnight loans with a tenure of one day |
| Purpose | Banks and NBFCs take loans at the bank rate to tackle their long-term operational requirements | Banks and NBFCs take loans at the repo rate to tackle short-term liquidity requirements |
| Impact on interest rate | Any change in the bank rate directly affects the home loan interest rate charged by commercial banks or NBFCs | Any change in the repo rate does not have a direct impact on the interest rate charged by banks or NBFCs |
| Interest rate | The bank rate is usually higher than the repo rate by one basis point | The repo rate is generally lower than the bank rate |
The Bottom Line
The RBI adjusts both the repo rate and bank rate from time to time to control cash flow and inflation in the country. If there is an increase in the bank rate and repo rate, it correspondingly increases the borrowing costs of banks and NBFCs in India, and subsequently, they raise their home loan interest rates. After the recent hike on 8 February 2023, the current repo rate stands at 6.50%, whereas the bank rate stands at 6.75%.
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Disclaimer- This article is based on the information publicly available for general use as well as reference links mentioned herein. We do not claim any responsibility regarding the genuineness of the same. The information provided herein does not, and is not intended to, constitute legal advice; instead, it is for general informational purposes only. We expressly disclaim /disown any liability, which may arise due to any decision taken by any person/s basis the article hereof. Readers should obtain separate advice with respect to any particular information provided herein.
