Bank Rate

Meaning:

The bank rate is the interest rate at which the Reserve Bank of India (RBI) lends  funds to commercial banks without any collateral. It serves as a crucial monetary policy tool  for managing money supply, inflation, and credit growth within the economy.

Example:

For instance, if the bank rate is set at 6.75%, a commercial bank borrowing ₹100  crore from the RBI would incur an interest expense of ₹6.75 crore per year.

How to understand bank rate:

The RBI adjusts the bank rate based on economic factors such as inflation, economic growth  trends, and liquidity levels.

An increase in the bank rate makes borrowing costlier for banks, which may lead to higher  lending rates for consumers, thereby slowing down credit and spending.

Conversely, a decrease in the bank rate encourages borrowing and spending, stimulating  economic growth.

Importance of the bank rate:

It plays a vital role in controlling inflation by tightening or easing the money supply.

It influences the behavior of banks in terms of lending, which directly impacts investments  and economic activity.

Changes in the bank rate signal the RBI’s stance on monetary policy, guiding businesses and  investors in their financial decisions.