Economy
Bank Rate
Bank Rate is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial papers.
Earlier Role of Bank Rate
- Bank Rate was once the policy rate in India, used to influence short term interest rates in the economy. A rise in bank rate raises the deposit as well as lending rates in the economy while a lowering of the bank rate reduces these rates. It was the central banker’s tool for controlling liquidity and inflation.
- Bank Rate ↑ → Interest Rates ↑ → Borrowing & Credit ↓ → Aggregate Demand ↓ → Inflationary Pressure ↓
- Bank Rate ↓ → Interest Rates ↓ → Borrowing & Credit ↑ → Aggregate Demand ↑
- On the introduction of Liquidity Adjustment Facility (LAF), discounting/rediscounting of bills of exchange by the Reserve Bank has been discontinued. As a result, the Bank Rate became dormant as an instrument of monetary management.
Key Features
- Penal Rate: Bank Rate acts as the penal rate charged on banks for shortfalls in meeting their CRR and SLR requirements.
- Statutory Basis: Bank Rate is published under Section 49 of the RBI Act, 1934.
- Aligned with MSF Rate: Bank Rate is aligned with the Marginal Standing Facility (MSF) Rate. It changes automatically as and when the MSF rate changes alongside policy repo rate changes.
Net Demand and Time Liabilities
The public’s demand deposits are demand liability of the bank and time deposits are time liability of the banks and the total demand and time deposits of the public is called ‘Net Demand and Time Liabilities (NDTL)’ of the banks.
