Bank Rate

Meaning:

The bank rate is the interest rate at which the Reserve Bank of India (RBI) lends  money to commercial banks without requiring collateral, typically for long-term borrowing.

It is a fundamental tool of monetary policy that the RBI uses to influence the economy by  controlling money supply, inflation, and credit growth.

Example:

For instance, if the bank rate is 6.75%, a commercial bank borrowing ₹100 crore  from the RBI would be liable to pay ₹6.75 crore in interest annually, reflecting the cost of

borrowing.

How to understand bank rate:

The bank rate is determined by the RBI’s Monetary Policy Committee (MPC) based on  various economic indicators, including inflation rates, economic growth trends, and global  economic conditions.

An increase in the bank rate results in higher borrowing costs for banks, which may lead to

increased lending rates for consumers, thereby reducing credit availability and spending in  the economy.

Conversely, a decrease in the bank rate lowers borrowing costs, encouraging banks to lend  more, which can stimulate economic growth and liquidity.

Importance of the bank rate:

It serves as a mechanism to control inflation; by raising the bank rate, the RBI can reduce the  money supply, thereby curbing inflationary pressures.

It encourages economic growth; lowering the bank rate can boost borrowing and investment,  leading to job creation and economic expansion.

The bank rate maintains financial stability by ensuring that banks have adequate liquidity to  meet demand while adhering to disciplined lending practices.

Changes in the bank rate reflect the RBI’s monetary policy stance, providing guidance for  businesses and investors regarding the economic outlook and credit conditions.

Difference Between Bank Rate and Repo Rate:

Bank Rate: This is the rate at which the RBI lends to commercial banks for long-term  purposes without collateral.

Repo Rate: This is the rate at which the RBI lends to commercial banks for short-term needs,  usually requiring collateral.