Question

What is bank rate policy? How does it work as a method of credit control?

Answer 1

Bank rates are the rates charged on the loans offered by the Central bank to the commercial banks without any collateral. The bank rate does not allow any facility of repurchase of securities. It relates to the borrowing by the commercial banks to cope with their immediate cash crunch. In case of inflation, the bank rate is increased due to which the cash left with commercial banks decreases with its credit creation capacity and in case of deflation the bank rate is decreased due to which commercial banks are able to create more credit.