Home ECONOMICS What is Bank Rate? | Current Bank Rate

What is Bank Rate? | Current Bank Rate

What is Bank Rate- Current Bank Rate

In this article, we discuss the meaning of Bank Rate. Trends of Bank Rate in India. What is the present bank rate?

Bank Rate

The bank rate is charged to commercial banks against the loan issued to them by central banks.

When commercial banks have shortage of funds, they borrow from the RBI. The rate at which RBI lends to the commercial banks for long term is called the bank rate.

If the bank rate is increased, commercial banks will borrow less as it is expensive to borrow. When they borrow lesser amounts and at higher rate, they give lesser amount of loans and at higher rate to the general public and when people get fewer loans, their demand for certain goods and services falls.

What is Bank Rate- Current Bank Rate

On the whole, there is lesser creation of money, lower demand for goods and lower circulation of money in the economy. When the economy is under the grip of inflation, bank rate is increased to control inflation.

When supply of money is higher than demand for money there is inflation. And hence, reducing money supply helps in reducing inflation and if supply of money is lower than the demand for money, there is depression.

The policy of keeping the bank rate very low is called the cheap money policy and the policy of keeping the bank rate very high is called the dear money policy.

Trends of Bank Rate in India

It is currently set to 6.00%. Followings are the data of bank rate of earlier year obtain from the RBI website.

Year Bank Rate (in %)
1953 3.5
1981 10
1991 12
2016 7

RBI has stopped using bank rate as an instrument to regulate money supply since last few years. And, is using repo rate, reverse repo rate instead. Bank rate is a rate for long term. Hence, cannot be changed in the very short period. While, repo and reverse repo rates can be altered in very short periods also. Thus, they help to regulate money supply in the short term.

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