With reference to Indian commercial banks consider the following statements:
1. The base rate system for the interest of commercial banks was introduced in 2010.
2. The base rate system has enabled a more informed assessment of the transmission of monetary policy impulses to banks' leading rates.
Which of the statements given above is/are correct?

Only 1

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Only 2

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Both 1 and 2

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Neither 1 nor 2

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Solution

The correct option is C Both 1 and 2
The base rate system was introduced in 2010 and it replaced the earlier Prime Lending Rate (PLR) system to which all lending rates were pegged. Base rate became the new floor rate below which no bank could lend. The base rate system was brought to increase transparency in the lending market and enable a more informed assessment of transmission of monetary policy changes to banks' lending rates.

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