What is Bank Rate ?

Question

What is Bank Rate ?

Accepted Answer

The correct option is 1:

The Bank Rate is historically defined as the interest rate at which a country's central bank (like the RBI in India) lends money to commercial banks, typically by rediscounting approved bills of exchange or first-class commercial paper. While the exact definition has evolved, the core concept remains that it is the rate used for long-term lending by the central bank. It is a critical monetary policy tool used to control the money supply and credit in the economy. By raising the Bank Rate, the central bank discourages commercial banks from borrowing, thereby reducing credit creation, and vice versa. It sets a benchmark for long-term lending.

The incorrect option is 2:

"Rate at which banks give loans" refers to the lending rates offered by commercial banks to their customers (individuals and businesses), such as the Base Rate or MCLR (Marginal Cost of Funds-based Lending Rate). These commercial lending rates are influenced by the Bank Rate but are not the Bank Rate itself.

The incorrect option is 3:

"The rate at which transactions take place between banks" most closely describes the Call Money Rate or the Repo Rate/Reverse Repo Rate (in certain overnight or short-term lending scenarios, depending on the context). The Bank Rate specifically involves transactions between the central bank and commercial banks, not solely between commercial banks themselves.

The incorrect option is 4:

"Rate received by the bank on long-term deposits" refers to the interest rate paid by commercial banks to their customers for fixed deposits or long-term savings. This is a liability for the commercial bank and has no direct equivalence to the Bank Rate, which is a rate charged by the central bank for lending.