Bank Rate, Repo Rate and Reverse Repo Rate

Bank rate, also referred to as the discount rate, is the rate of interest which a central bank charges on the loans and advances that it extends to commercial banks and other financial intermediaries. Changes in the bank rate are often used by central banks to control the Money supply

Repo or repurchase agreement is the rate at which the central bank of a country(Federal bank in case of US and RBI in case of India) lends to other banks. The banks which borrow money from Central Bank to meet short term needs have to sell securities, usually bonds to the Central Bank with an agreement to repurchase the same at a predetermined rate and date. In this way, for the lender of the cash (usually the Central Bank), the securities sold by the borrower are the collateral against default risk and for the borrower of cash (usually commercial banks), the cash received from the lender is the collateral.

Reverse Repo rate is the rate at which banks park their short-term excess liquidity with the Central Bank. The Central Bank uses this tool when it feels there is too much money floating in the banking system. An increase in the reverse repo rate means that the RBI will borrow money from the banks at a higher rate of interest. As a result, banks would prefer to keep their money with the RBI.