Which of the following describes the difference between a bank's 'Repo Rate' and 'Bank Rate'?

Correct Answer: Repo Rate is for short-term borrowing with collateral; Bank Rate is for long-term borrowing without collateral.

Subject: economics

• Repo Rate is for long-term borrowing; Bank Rate is for short-term borrowing.
• Repo Rate does not require collateral; Bank Rate requires collateral.
• Repo Rate is for short-term borrowing with collateral; Bank Rate is for long-term borrowing without collateral.
• Both are exactly the same and used interchangeably.

Explanation: • <b>Key Fact</b> Repo Rate is the rate at which RBI lends money to commercial banks against government securities (collateral) for short-term needs. • <b>Supporting Detail</b> Bank Rate is the rate at which RBI lends long-term funds to commercial banks without requiring any security or collateral. • <b>Related Concept</b> Both are Quantitative tools used by the RBI to implement monetary policy. • <b>Why wrong options are wrong</b> Option A and B reverse the definitions. Option D is factually incorrect. • <b>Exam Trick</b> "Repo" includes "Repurchase agreement" which implies securities are involved (collateral). • <b>Additional Info</b> Increasing the bank rate makes borrowing costlier, which discourages lending and reduces credit flow in the economy.

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