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What is the bank rate?

by Uddipana Gogoi

The bank rate is the rate at which the central bank of a country lends money to commercial banks. In other words, it is the rate at which commercial banks discounts and rediscounts commercial bills with the RBI. It is one of the monetary policies of the Reserve bank of India. It is also known as  the rate of interest which a RBI charges on its loans and advances to a commercial banks.

Under this policy, commercial banks borrow money from the RBI without any collateral security. The Reserve Bank of India determines the bank annually depending on the circulation of money in the economy. The changes in such rate also affect money supply in the economy. It is because of changes in borrowing capacity of commercial banks due to changes in such rate.

When the RBI wants to inject more money in the economy, it reduces the bank rate. Such reduction leads to reduction in prime lending rates of commercial banks. In other words, it encourages the commercial banks to borrow more at a cheap rate. Hence, the banks are also able to lend money to the retail borrowers at a low interest rate. Similarly, when the RBI wants to restrict money supply in the economy, it increases the bank rate. Such increase leads to increase in prime lending rates of commercial banks.

On the other hand, it discourages the commercial banks for borrowing from the Reserve Bank of India. Hence, the commercial banks have left less money for retail lending.  Thus the commercial banks increase their prime lending rates. In India, the RBI determines the rate for the same annually depending on the money supply and monetary policy. 

The rate of last two years is shown in the table below-

YearBank rate (%)

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