What is the bank Rate what are the effectects of changes in bank rate
Answers
Bank Rate refers to the rate of interest in which RBI lends money to other financial institutions of the country such as Banks, etc for a long term such as a year or two.
If the time period is short term, say 6 months, then the interest at which RBI lends to the Banks is called REPO Rate (REPO stands for Repurchasing of Orders (or) Repurchase Agreement).
There are 2 possible ways in which Bank Rate can affect the economy of the country. They are:
1. Dearer Money Policy
2. Cheaper Money Policy
Dearer Money Policy:
It is a situation in which the Bank Rate is increased by the RBI. Due to this, banks lend money or loans at higher interests due to which the demand for loans reduce as they are dearer (costlier). This is called Dearer Money policy.
Cheaper Money Policy:
It is a situation in which the Bank rate is decreased by the RBI. Due to this banks can lend money or loans at lower interests due to which the demands of the consumers are met in a cheaper way. This is called Cheaper Money policy.
The Bank rate must be regulated in such a way to keep the system balanced.