CONTROL OF MONEY SUPPLY BY RBI (PART 1) : BANK RATE , OPEN MARKET OPERATIONS AND REPO

The Central Bank (RBI) controls the supply of money in the economy by adopting various measures relating to credit supply by the commercial banks.

These measures are both

(i) Quantitative - Bank Rate, Open Market Operations, Repo Rate, Reverse Repo Rate, Cash Reserve Ratio and Statutory Liquidity Ratio

(Ii) Qualitative - Margin Requirement, Rationing of Credit and Moral Suasion

We shall discuss Bank Rate, OMO and Repo Rate in this video

- Bank Rate refers to the rate of interest at which the RBI lends money to the commercial banks fulfilling the instant loan requirement of the commercial banks

- Open Market Operations refer to the sale and purchase of securities in the open market by the RBI on behalf of the government

- Repo Rate is the rate at which the RBI offers short term loans to the commercial banks by buying the government securities in the open market

(**Open Market refers to interbank trade in securities)

Difference between Bank Rate and Repo Rate

• Bank Rate refers to the rate of interest on loans offered by the RBI to the commercial banks without any collateral whereas Repo Rate refers to the rate of interest on loans offered by the RBI to the commercial banks with collateral.
• Bank Rate does not allow any facility of repurchase of securities. It is simply the rate of discount. Whereas, Repo Rate allows the repurchase of securities.
• Bank Rate relates to borrowings by the commercial banks to cope with their immediate cash requirement, whereas, Repo Rate relates to short term borrowings by the commercial banks.