What is Bank Rate ?, Bank rate gk facts, What is Bank Rate upsc

What Is Bank Rate ?

Let’s read about What is Bank Rate ?, Bank rate gk facts, What is Bank Rate upsc.

What is Bank Rate ? -:

~ Bank Rate is the official interest rate at which Central Bank ( Reserve Bank of India ) provides loans to the banking system which includes commercial banks, cooperative banks, development banks and other financial institutions without keeping any security.

~ Bank Rates in India is determined by the Reserve Bank Of India ( RBI ).

~ A bank can borrow money at the current bank rate from the central bank of a country when a bank have fund deficiency. The borrowing is done as per the basis of the monetary policy of that country.

~ There is no agreement on repurchase, no securities sold and no collateral involved.

~ Bank Rate is usually higher than Repo Rate as it is an important tool to control liquidity.

~ Bank Rate caters to long term financial requirements of commercial banks.

~ Such type of loans are given out either by direct lending or by rediscounting the bills of commercial banks and treasury bills. Thus, the Bank Rate is also known as Discount Rate.

~ Banks borrow funds from the central bank and lends the money to their customers at a higher interest rate, thus, making profits. When Reserve Bank of India increases the bank rate, the cost of borrowing for banks rises which in return, reduces the supply of money in the market. Increase in Bank Rate directly affects the lending rates offered to the customer, restricting people to avail loans and affects the overall economic growth. Thus, increase in Bank rate reflects tightening of RBI monetary policy.

~ When Reserve Bank of India decreases the bank rate, the cost of borrowing for banks also decrease which in return, increase the supply of money in the market. It becomes easy to borrow money to purchase homes and cars, and consumer spending increases.

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