Home » UPSC IAS » An increase in the Bank Rate generally indicates that the

An increase in the Bank Rate generally indicates that the

June 1, 2025 by rawan239

An increase in the Bank Rate generally indicates that the

market rate of interest is likely to fall

Central Bank is no longer making loans to commercial banks

Central Bank is following an easy money policy

Central Bank is following a tight money policy

This question was previously asked in

UPSC IAS – 2013

Download PDF Attempt Online

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.

In modern monetary policy, the repo rate (the rate at which banks borrow from RBI for short term against government securities) has largely replaced the Bank Rate as the primary tool for signalling monetary policy stance and managing liquidity. However, the principle remains the same: raising these policy rates signals monetary tightening, while lowering them signals easing.

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