WHAT IS BANK RATE ?
Bank rate as a monetary tool had a different definition and application earlier. Bank rate now has a completely new definition. Initially bank rate used to be that rate of interest at which the banks borrowed for long term period (more than 90 days) from RBI. If the bank rate was increased it used to become costlier for the banks to borrow from RBI. Hence, while providing loans to the consumers even the banks used to charge a higher rate of interest. Because of this borrowing used to become costlier and the borrowers were discouraged from borrowing. It was used to bring down the demand and control the inflation. On the other hand if the bank rate was reduced, borrowing cost for the banks used to fall down. Hence the banks used to provide loans to consumers at a lower rate of interest. However the bank rate is not used in this way anymore.
In 1999 on experimental basis the RBI introduced Liquidity Adjustment Facility (LAF), which included Repo Rate and Reverse Repo Rate. From 2000 onwards this LAF was made permanent.
After its introduction the bank rate as an instrument started losing its relevance. Hence the function and definition of the bank rate was changed completely by the RBI. At present bank rate serves as a benchmark for imposing penalty over the banks in case of non maintenance of CRR and SLR by the RBI.
Comments
Post a Comment