Q. An increase in the Bank Rate generally indicates that the

• Market rate of interest is likely to fall
• Central Bank is no longer making loans to commercial banks
• Central Bank is following an easy money policy
• Central Bank is following a tight money policy

Answer: (d) Central Bank is following a tight money policy

Bank Rate:

• Bank Rate is the interest rate at which a country’s central bank lends money to domestic/commercial banks, usually in the form of relatively short-term loans.
  • In India, the central bank is the Reserve Bank of India (RBI).
• Commercial banks are not required to keep any collateral as security when borrowing at Bank Rate.
  • There is no repurchasing agreement and obligation to repay on a particular date.
• Section 49 of the Reserve Bank of India Act, 1934, governs the publication of the Bank Rate.
• This rate is linked to the MSF rate, therefore it adjusts automatically when the MSF rate changes, as well as when the policy repo rate changes. Bank rate is slightly higher than Repo Rate.
• Determination of Bank Rate:
  • The Reserve Bank of India (RBI) is the authority in India to determine the Bank Rate.
  • The RBI in its bi-monthly monetary policy review announces the bank rate based on the macroeconomic situation.
  • The Bank Rate is announced keeping in mind the primary goal of inflation targeting.
  • If the Bank rate is decreased then it increases the money supply in the economy as the banks borrow and lend it to customers. On the other hand, if the Bank rate is increased it will inhibit the money supply in the economy.

Difference between Bank Rate and Repo Rate