Define or Explain the following concepts. 3. Bank Rate

Define or Explain the following concepts.

3. Bank Rate

Answer: 

3. Bank Rate refers to the rate of interest at which the Central Bank lends money to the commercial banks or the rate at which the Central Bank discounts the bills of the commercial banks. This rate is also called the rediscount rate. This instrument is a key in the hands of RBI to control money supply. Change in the bank rate changes the cost of borrowings, thereby affecting money supply. An increase in the bank rate increases the cost of borrowing for commercial banks from the Central Bank. The commercial banks, in turn, increase the lending rate for their customers. However, this increase in the lending rate reduces the borrowing capacity of the public, thereby discouraging loans and credit.

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