. This is usually expressed as a percentage of the total amount loaned.What are Interest Rates? The interest rate is the yearly price charged by a lender to a borrower in order for the borrower to obtain a loan.

The rate of interest is a price that can be analysed in the normal framework of demand and supply. . The proportion of a sum of money that is paid over a specified period of time in payment for its loan. It is the price a borrower has to pay to enjoy the use of cash which he does not own. and the return a lender enjoys for deffering his consumption or parting with liquidity.In other words.

The interest rate as a price is determined by market forces and administered by the government authority .€ Interest rates on different financial instruments differ widely in different countries.

. Changes in the bank rate are often used by central banks to control the money supply.Different rates of interest what is bank 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.

it is the rate at which a central bank of a country gives loans and advances to the commercial banks.In other words. € . Bank rate is a rate at which RBI lends money to the commercial banks. it is the only rate which helps the economy in controlling inflation and deflation € In short. Bank rate serves as basic parameter for all commercial banks to fix rate of interest on long term loans to the individuals and corporate It is fixed by the RBI in consultation with the finance ministry.

.what is call money rate? It is the rate charged for short term inter bank financial flow. The balance amount of deposits are invested in advances and investments with diverse maturity date. The commercial bank keeps only a certain portion of their deposits as cash to meet the demand for cash of their deposits.

.Call money rates may be market determined in the absence of active government interference. Call money rates fickle and fluctuate widely depending upon business sentiments and changing demands for very short term funds.

It either injects liquidity into the market if the conditions are tight or sucks out liquidity if the liquidity is excess in the system through the Repo and Reverse Repo mechanism. .what is repo rate? Repo and Reverse Repo are tools available in the hands of RBI to manage the liquidity in the system.

In REPO RBI injects liquidity into the system i. it purchases the securities from the banks and lends money to them to ease their liquidity crunch. The rate charged for it is the Reverse Repo rate. The rate charged by it for lending money is the REPO rate. RBI sucks it out by Reverse REPO by lending securities and taking out money from banks. The call money rates generally fall in between this corridor .e. These rates. form the bottom and the top of the Call money lending/borrowing of the banks. Reverse REPO is the opposite of REPO: When liquidity is excess in the system.

.When RBI intends to increase liquidity in the market it engages itself in REVERSE REPO. whereas the rate at which RBI borrows from the commercial bank is called as REVERSE REPO. The rate at which commercial banks borrow from the RBI is called REPO RATE.

It also has a subsequent effect on the overall interest rate structure. The cut in the repo rate is also know as FLOOR RATE.In other words. repo rate is the rate at which the rbi lends short term funds to the commercial banks A cut in the repo rate immediately affects the inter bank call money rate. .

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