Bank Rate – Definition, Meaning, Bank Rate In India

By BYJU'S Exam Prep

Updated on: November 14th, 2023

Bank Rate is the interest rate of financial institutes at which India’s central bank, the Reserve Bank of India (RBI), provides loans to domestic or commercial banks. Usually, the RBI gives short-term loans to commercial banks without requiring them to keep collateral and purchase security. Commercial banks also don’t need to repurchase agreements when borrowing loans from the central bank at the Bank Rate.

The Bank Rate’s interest is applied to the central authority managing the finances of the country and supplying the economy in the economy and the banking sector. The alteration in the bank rate influences and impacts the economy of the country in all niches and domains. The topic of “Bank Rate” is essential for the UPSC exam and the aspirants must prepare well for accomplishing good grades in the most sought-after exam. Walk through the article to check out the bank rate meaning, definition, and other details.

What Is Bank Rate?

Bank Rate Policy and Marginal Standing Facility (MSF) rate have a link, and when the MSF rate changes, so does the Bank Rate. The Reserve Bank of India decides the Bank Rate. This rate is slightly higher than Repo Rate. The bank rate meaning states that the interest rate charged to the commercial and financial banks of India by the head of the financial institutes, Reserve Bank of India.

Bank Rate UPSC PDF

The RBI, in its monetary policy review, determines the Bank Rate based on the entire situation of the overall economy. The Reserve Bank of India lends large funds to commercial banks at this rate.

The Reserve Bank of India is the main authority determining the bank rate, it is altered frequently. Though, there is no prescribed or fixed schedule for the alteration of the Bank Rate.

What Is Bank Rate In India?

As of February 2023, the latest Bank Rate from RBI is 6.75%. The RBI determines this rate and other rates such as Repo Rate and Reverse Repo Rate. The current Repo Rate is 6.50%, and the Reverse Repo Rate is 3.35%. These rates may change due to changes in the MSF rate and prevailing economy from time to time. Section 49 of the Reserve Bank Of India Act 1934 regulates and determines the Bank Rate. The Reserve Bank Of India executes the monetary policy review bi-monthly in which the bank rate is declared by the officials depending on the macroeconomic situation of the country.

Impact Of Bank Rate

The Bank Rate policy depends on the MSF rate, and when the Reserve Bank of India increases the Bank Rate, the commercial bank borrows the funds at a higher price and reduces the credit volume. When the Bank Rate rises, banks experience a decline in the money supply. The Bank Rate is determined keeping into consideration the primary goals of attaining the inflation targets. If the bank rate is reduced then the economic flow in the country increases, on the other hand, if the bank rate surges the economic flow in the country decreases.

Bank Rate Vs Repo Rate

The significant difference between the Bank Rate and Repo Rate is that the Bank rate directly impacts customers since it impacts long-term funds lending. In contrast, Repo Rate doesn’t impact the customer directly.

The Reserve Bank Of India applies Repo Rate to the repurchase of securities sold by commercial banks and the Bank Rate to loans that the RBI gives to commercial banks.

The Repo Rate is lower than the Bank Rate due to the collateral and repurchase obligation. The Reserve Bank of India provides Repo Rates on short-term financial lending to banks while Bank Rates issues to long-term requirements of domestic banks.

Why is the Bank Rate in the News?

The bank rate usually covers the headlines as the RBI, in its determines the key policy rates, including Repo Rate, Bank Rate, and Reverse Repo Rates. In May 2020 the bank rates were not changed, it was the tenth consecutive time in which Bank Rates remained unchanged.

These rates are more likely to rise due to the current inflation level. The Bank Rate is the central bank’s interest rate when a financial institution borrows money from them. When banks are unable to reserve requirements and preserve liquidity, it goes to central banks for loans.

How to Calculate Bank Rates?

The central financial authority of the nation charges an interest rate that is directly related to the money supply of the entire economy. Hence, the Reserve Bank of India (RBI) controls and determines the bank rate in India. The RBI has several tools to regulate the supply of money and credit in the economy, including the repo rate, reverse repo rate, and the Cash Reserve Ratio (CRR).

Furthermore, when there is a change in the bank rate, there is a significant influence on the entire economy. For instance, the stock market prices can change when fluctuations in the bank rate occur. Moreover, these changes in interest rates also affect the customers who borrow loans from financial institutions.

Bank Rate Policy

The Bank rate policy denotes the policy by which the Reserve Bank of India (RBI), the country’s central bank, regulates the supply of money and credit in the economy. As you know, the bank rate is the rate of interest at which banks borrow funds from the RBI. Hence, changes in this interest rate not only affect the banks but also the rest of the economy.

Furthermore, the Reserve Bank of India has the power to increase or decrease the supply of money in the country. When they wish to increase the money supply, RBI decreases the bank rate. On the contrary, to decrease the money supply in the economy, RBI increases the rate of interest for banks. Therefore, we can conclude that the bank rate policy is one of the key monetary tools used by the central financial institution of India to achieve its economic goals.

Bank Rate For UPSC Exam

The aspirants preparing for the IAS exam must be well conversant with the complete details of the topics such as the bank rate and other pertinent details. You can practice the UPSC previous year papers, and complete the syllabus comprehensively for a better understanding of the concepts and fundamentals.

The previous year questions pertaining to the bank rate definition, meaning will provide the candidates with complete ideation of the fundamentals and the types of questions asked in the exam. Also, get in touch with the illustrated difference between the bank rate and the repo rate.

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