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Difference between interest rate and cash rate (bank rate)

Banking awareness 2017 ,Difference between interest rate and cash rate (bank rate).Interest rate is the rate payable on a sum deposited with a bank or the borrowed amount on which interest rate is payable to the bank. In developing country like India, the interest rate is very high as compared to all developed countries where interest rate lies between 2-3 % on borrowed amount. India has almost 16-17% interest rate on personal rate and around 10% interest rate on home loan and collateral based lending. On the other hand, Bank rate also called as cash rate is the rate on which the central bank gives loan to the commercial banks. Bank rate is generally for longer period of time as compared to the repo rate which is for short time lending given by the RBI. There are several difference between cash rate and interest rate which are discussed below.

Interest rate:

It is a common term and everyone must be aware of it. It is the rate which one has to pay on borrowed money or the interest which entity pays on deposited money. It is a common name for both the aspects. It is of two types:

  1. Simple interest
  2. Compound interest

Simple interest rate:

The interest rate remains fixed for each year. Formula to calculate it is

SI= P*R*T/100 where P= Principal (amount lend), R= Rate of interest and T= time in years

Compounded interest

Compound interest is the interest which increases each year by the factor of R%. the formula to calculate Compound interest is as under:

C.I= [(P(1+R/100)^t)-1]

P,R,T have their usual meanings.

Bow come to the Bank rate (cash rate)

Cash rate is the rate at which RBI lends money to the commercial banks against their securities for short term or long term period. It is an instrument with the RBI to control inflation and price rise in the country. The main purpose of increase or decrease in cash rate is to regulate the financial system to run the economy properly. A cash rate increases or decreases just in basis points.

Difference between Cash Rate and Interest Rate

Basis Interest rate Cash rate
Meaning An interest rate is a rate at which a charge is either received or paid on saving or borrowed funds. When a commercial bank borrows funds from the central bank, it is called a cash rate.
Managed by An interest rate is managed by the banks. A cash rate is managed by the central authority or bank.
Effect on each other An interest has no effect on cash rate. A cash rate has an effect on the interest rate.
Effect on economy An interest rate directly affects the economy. A cash rate indirectly affects the economy.
Affected by An interest rate is affected by external factors like inflation, government policy etc. A cash rate is generally affected by the internal factors.

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