An increase in the Bank Rate generally indicates that the
[amp_mcq option1=”market rate of interest is likely to fall” option2=”Central Bank is no longer making loans to commercial banks” option3=”Central Bank is following an easy money policy” option4=”Central Bank is following a tight money policy” correct=”option4″]
This question was previously asked in
UPSC IAS – 2013
An increase in the Bank Rate indicates that the Central Bank (RBI in India) is following a tight money policy.
The Bank Rate is the rate at which the RBI is prepared to buy or rediscount bills of exchange or other commercial paper. Historically, it was the rate for long-term lending to banks. An increase in the Bank Rate makes borrowing from the central bank more expensive for commercial banks. This discourages banks from borrowing, limits credit creation, and tends to push up overall interest rates in the economy, thereby curbing inflation and economic activity. This is characteristic of a tight or dear money policy.