Chapter 3 Part 2 - Banking
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Chapter 3 Part 2 - Banking
Last updated at Dec. 13, 2024 by Teachoo
It is the Rate charged by Central Bank from Commercial banks
on loans given by Central Bank to commercial banks
If Central Bank wants more loan to be given, it decreases its bank rate
If Central Bank wants less loan to be given ,it increases its bank Rate
What is Bank Rate or Repo Rate? Rate of Interest charged by Central Banks on these loans is Repo Rate Central Bank gives loans to Commercial Banks for lending to Public RBI gives loan to SBI @ 8% SBI uses this money to give loan to Mr A @ 11% Example RBI (Central Bank) SBI (Commercial Banks) A (Public) This 8% is called Repo Rate or Bank Rate This 11% is called Lending Rate of Bank Who Determines Repo Rate? Central Bank (Example – RBI in India) Who Determines Lending Rate It is determined individually by each bank Effect of Repo Rate Change –Increase/Decrease What happens if Repo Rate Increase? What happens if Repo Rate Decrease? Suppose RBI decrease Repo Rate from 8% to 6% Suppose RBI increase Repo Rate from 8% to 9% Central Bank Commercial Banks Commercial Banks Public If Repo Rate Increases More interest will be paid by bank to RBI Bank will also charge more Interest from customer People will take less loans Decrease in Money Supply with Public If Repo Rate decreases Less interest will be paid by bank to RBI Bank will also charge less Interest from customer People will take more loans Increase in Money Supply with Public
