Question

Bank rate means ____________.
1. Interest rate charged by moneylenders
2. Interest rate charged by the scheduled banks
3. Rate of profit of the banking institution
4. The official rate of interest charged by the central Bank of the country

Answer 1

Correct Answer - Option 4 : The official rate of interest charged by the central Bank of the country

The correct answer is The official rate of interest charged by the Central Bank of the country.

• A bank rate is the interest rate at which a nation's RBI lends money to domestic banks, often in the form of very short-term loans.

• Managing the bank rate is a method by which RBI affects economic activity.
• Bank Rate: It is also called the rediscount rate. It is the rate, at which the RBI gives finance to commercial banks.
• The bank rate is monitored by RBI to ensure profitability for the banks.
• An increase in bank rate will lead to a decrease in money supply as the lending rate will be increased for credit to borrowers.
• Due to a decrease in bank rate, it becomes cheaper for banks to take loans from the Reserve Bank and hence the banks reduce the interest rates so that the maximum amount can be given as a loan. 

• Reserve Bank of India (RBI):
  • RBI was set up on the basis of the Hilton Young Commission recommendation in April 1935, with the enactment of the RBI Act, 1934.
  • It was nationalized on the basis of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948.
  • The Custodian of India’s foreign exchange reserves is the Reserve Bank of India.
  • Its first Governor was C.D. Deshmukh.
  • The headquarters of RBI is in Mumbai.
  • Current governor of RBI is Shaktikanta Das.

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• Cash Reserve Ratio (CRR):
  • The RBI (Amendment) Bill, 2006, empowers RBI to prescribe CRR–Cash that banks deposit with the RBI without any floor rate or ceiling rate.
• Statutory Liquidity Ratio (SLR):
  • It is the ratio of a liquid asset, which all commercial banks have to keep in the form of cash, gold, and unencumbered approved securities equal to not more than 40% of their total demand and time deposit liabilities (ranges is 25‑40%).
• Repo Rate:
  • It is the rate, at which RBI lends short-term money to the bank against securities.
• Reverse Repo Rate:
  • It is the rate, at which banks park short-term excess liquidity with the RBI.
• Open Market Operations (OMOs):
  • Under OMOs, the RBI sells G-securities in the market.
• Quantitative credit controls are used to control the volume of credit and indirectly to control the inflationary and deflationary pressures caused by expansion and contraction of credit.