Q. Which of the following would be the effect of increase in Bank Rate?

[A] It increases the cost of borrowing by commercial banks.

[B] It increases the supply of money.

[C] It shows tightening of RBI monetary policy.

[D] Both (a) and (c)

Answer: D

Explanation: Bank Rate:

  • Bank Rate refers to the official interest rate at which Central Bank (RBI) will provide loans to the banking system which includes commercial / cooperative banks, development banks etc.
  • Central Bank buys or rediscounts bills of exchange or other commercial papers at Bank Rate. It also signals the medium-term stance of monetary policy.
  • Bank rate is used as a signal by the RBI to the commercial banks on RBI’s thinking of what the interest rates should be. When bank rate is raised, it is expected that all interest rates will move together in the same direction.
  • It also decreases the money supply in market.

Difference between Bank Rate and Repo Rate:

  • Bank Rate and Repo Rate seem to be similar terms because in both of them RBI lends to the banks.
  • However, Repo Rate is a short-term measure and it refers to short-term loans and used for controlling the amount of money in the market.
  • On the other hand, Bank Rate is a long-term measure and is governed by the long-term monetary policies of the RBI.

Source: Ramesh Singh