Bank Rate


Bank rate is the rate at which Reserve Bank of India lends money to the commercial banks by buying their eligible rated securities – bills of exchange or commercial paper.

The rate is charged by RBI (Reserve Bank of India) on its long-term lendings.

This is one of the methods to control the currency supply for the economy and the banking sector.

Bank can borrow money without pledging government securities to RBI. (No Collateral)

Penal rates are linked with Bank rate.

For example, If a bank doesn’t maintain CRR, SLR as per the prescribed limit. Then RBI can impose penalty interest on such notorious bank.

Bank Rate is now used only for calculating penalty on default in the maintenance of cash reserve ratio (CRR) and the statutory liquidity ratio (SLR).

Bank rate has been aligned to the MSF (Marginal Standing Facility) rate.

Bank rate changes automatically as and when the MSF (Marginal Standing Facility) rate changes.

 

Who can burrow?

[1] Government of India

[2] State governments

[3] Banks

[4] Financial Institutions

[5] Co-operative Banks

[6] NBFCs (Non-banking Financial Companies)

 

When RBI increases bank rate—

[1] When RBI increases bank rate, it is called dear money policy.

[2] Money becomes costlier.

[3] To fight inflation RBI increases bank rate.

[4] Demand for credit decreases.

[5] Increase in Bank rate reflects tightening of RBI monetary policy.

 

When RBI decreases bank rate—

[1] When bank rate is lowered, it is called cheap money policy.

[2] Money supply in the economy is increased.

[3] Cheaper loan rates.

[4] RBI lowers the bank rate during a period of recession/slowdown.

[5] Reduced costs of loans, encourage companies/manufacturing units etc. to borrow more for increasing production and consumers to spend more.

[6] To fight deflation RBI decreases bank rate.