Bank Rate (RBI) - Explained in Hindi - YouTube

Namaskar, my name is Mukul, and welcome to Asset Yogi.

Friends, this video is part of a series in which we are discussing RBI's monetary policy.

In the first video, we understood CRR and SLR.

How RBI Controls Inflation From Cash Reserve Ratios and Statutory Liquid Ratios.

And in another video, we discussed Repo Rate and Reverse Repo Rate.

How does RBI maintain a balance between inflation and growth

with repo rate and reverse repo rate.

Similar to repo rate and reverse repo rate, there are two more rates.

One is the bank rate

Second is marginal standing facility rate

In this video, we are going to focus on bank rate

In the next video, I will cover the MSF rate.

In this video, we will understand what a bank rate is and its concept.

What is the current rate of Repo rate, reverse repo rate,

bank rate or MSF rate in today's date

It's not much important, it is more important to understand their concept

Rates can go up or down.

In this video, we will try to understand that bank rate which was the key policy

Why did we need to replace the repo rate?

And why is the bank rate significance reduced presently ?

If the significance is decreased

Then what is its purpose?

That is what we will try to find out in this video.

Let's go straight to the blackboard.

If we talk about bank rates and If we talk about its historical past.

Bank rate used to be the key policy in India

RBI is used to decide the monitory policies directly from the bank rate.

And in today's time, if we talk about repo rate,

Earlier The repo rate was the bank rate.

And today's date repo rate is the key policy rate.

It means if the repo rate increases

So it means RBI is trying to reduce inflation

That means the interest rate of all banks depends on the repo rate.

Banks get an indication that if RBI increases the repo rate, then

We also have to increase the interest rate

And if interest rates increase in the market

If the loan interest rate will increase for consumers like us

So it is normal that we will take limited loans.

If we take limited loans then the demand will decrease

If the demand will diminish then so apparently price will also reduce

So in this way, inflation will reduce

So in this way, RBI can control inflation with the repo rate

And suppose if RBI wants to boost growth

So RBI reduces the repo rate

I have already made a detailed video on repo rate and reverse repo rate.

You can watch my video if you want.

Come back to the bank rate.

If you read the definition of bank rate on Wikipedia, Investopedia

or anywhere else, so you might be confused

So let me tell you clearly, the bank rate is still the key rate in many countries internationally.

The bank rate is being used internationally, in many countries.

But it is not being used in India.

Significant of bank rate has become very minor in today's date

Before this was the key policy rate.

The bank rate has been completely d-linked as of today's date

Any other interest rate does not depend on the bank rate

All interest rates depend on the Repo rate.

The bank rate is also linked to the Repo rate.

I'll also show you how it's linked

We have understood what is the difference between bank rate and repo rate.

Now let us talk about what is the purpose of bank rate

Today there are only two main purposes of the bank rate.

First, it is used as a discount rate.

Like banks have bills of exchange.

Or they have some commercial papers

So the bank can get them discounted by the RBI.

And I will explain in detail how this discounting is done.

Now we are considering that the bank rate is used as a discount rate.

In fact, the other name for the bank rate is the discount rate.

What is its second purpose?

It is also used as a penalty rate.

I talked about SLR and CRR requirements in the previous video.

If you haven't watched the SLR and CRR video

So you must watch that video too.

You will get an overall idea about monetary policy.

If banks do not maintain their SLR and CRR requirements,

So the RBI imposes a penalty on them.

And the rate of that penalty is decided by the bank rate.

If there is a default of 1 day of the bank

So bank rate + 3% penalty is applied

and in subsequent defaults bank rate +5% penalty is levied.

So here also the bank rate is used.

what should be the bank rate

Bank rate is linked to repo rate as of now

And it can be Repo rate + X%.

X% can be anything

As of today's date, the Repo rate is running at 6.5%.

And X is 0.25%

That means as of today bank rate is 6.75%

But initially, the bank rate was pegged with repo rate

And it was said that the bank rate was always 1% higher than the repo rate.

RBI also keeps on changing X%

Keep in mind that the bank rate is always slightly higher than the Repo rate.

But yes, as of today's date, the bank rate is equal to the MSF rate.

So I write here specifically.

So MSF rate (marginal Standing Facility Rate) is also 6.75%

I will tell you what is the MSF rate

So it is clear to us that as of today's date bank rate has these two purposes.

There is no other purpose other than this

Before bank rate was very important

Now its significance is not that much.

Now the repo rate is valuable.

You must watch the video of the repo rate.

From that, you will completely understand how the repo rate works.

Now let me tell you how a bank rate works like a discount rate

Suppose a company has a bill of exchange

Let's say there is an exporter who goes to the bank

Either with the bill of exchange or a promissory note.

And he says its value is 1 crore

But its payment date is after 3 months.

And that company wants to get the cash of ₹1 Crore today.

Even though I may get less money

but I have a requirement of cash today.

So the bank says okay we will give you money today.

But we will not give you ₹1 Crore

we will apply a discount on it

We will give you only 97 lakhs.

So here a discount of ₹ 3,00,000 is applied.

We call this discount bill discounting.

And I have told you this too.

You can watch my bill discounting video

I have also made videos on the bill of exchange and promissory note

You can also watch these videos if you want to know the concepts.

The 97 lakhs that has been allotted depends on what?

the bank discounts the bill of exchange at its discount rate.

This means the bank is charging ₹3,00,000 interest for 3 months.

And the bank is saying that we are giving you ₹ 97 lakh today.

And after 3 months the bank will collect this amount

Whoever has to pay by the Bill of Exchange

The bank will collect this amount from him

The bank receives a bill of exchange of rupees one crore.

Bank says why do we wait for 3 months

We use the facility provided to us by RBI

So the bank goes to the RBI

And the bank says that you take this bill of exchange or promissory note from us

Its value is one crore rupees, after 3 months you will collect its value.

RBI says ok but I will give you ₹98 lakhs only

the bank says no problem

We have given Rs 97 lakh

And we are getting 98 lakh rupees

So we are having profit of ₹1,00,000.

So the risk was taken by the bank.

The payment of that risk is ₹ 1,00,000.

RBI has decided an amount of ₹ 98,00,000

How it is decided

At which rate did RBI discount this value?

RBI discounts at the bank rate.

So this is another use of the bank rate

The first is the discount rate.

The second is the penal rate.

These are the two uses of the bank rate.

So I think you must have cleared the concept of bank rate very well here.

So that's all for this video.

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