Explain the meaning of bank rate policy

Bank rate can be defined as the rate of interest that is charged by a central bank while lending or giving loans to a commercial bank. A bank can borrow money from the central bank of a country if it is insufficient in funds. In India’s case, the central bank would be the Reserve Bank of India. The borrowing is dealt as per the basis of the monetary policy of that country. In simpler words, the Bank rate is a rate at which the Reserve Bank of India (RBI) provides the loan to commercial banks without keeping any security There is no single agreement on repurchase that will be drawn up or agreed upon with no collateral as well. The RBI permits short-term loans with the presence of collateral. This is also referred to as Repo Rate. Bank Rates in India is evaluated by the RBI. It is normally higher than a Repo Rate on account of its ability to regulate liquidity.

Determination of Bank rate

The interest rate is imposed by a nations central financial authority which controls the money supply in the economy as well as the banking sector. This is normally done quarterly in order to stabilise inflation and control the country’s exchange rates. When a bank rate changes it triggers a contagion effect which influences every sphere of a country’s economy. For example prices in stock market vary due to fluctuations in interest rate changes. A change in bank rate affects customers and hence it affects the rates at which the costumers take loans.

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