Question

What is bank rate? Discuss the tools used by RBI to control the monetary policy.

Answer 1

Interest rate at which a central bank will advance short term loans to commercial banks is known as bank rate. Changes in bank rate are reflected in the prime lending rates offered by commercial banks to their best customers, which in turn affect investments such as bank deposits, bond issues,and mortgages.
The Reserve Bank of India (RBI) and its attempt at managing liquidity, inflation and growth through its monetary policy has been constantly in the news. And its decision to cut rates or not has become the subject matter of much non-economist discussion. There are five main policy tools that RBI uses:
1) Repo and reverse repo rate
2) Cash reserve ratio (CRR)
3) Open market operations
4) Statutory Liquidity Ratio
5) Bank rate