Question

What is Bank Rate ?

• A. A rate at which the Central Bank gives loan to the public customers.
• B. A rate at which the Central Bank gives loan to the Commercial Banks.
• C. Both (a) and (b)
• D. None of the above

Hint:

Central Bank $\rightarrow$ Commercial Bank = Bank Rate.
Commercial Bank $\rightarrow$ Public = Lending Rate.
Central Bank NEVER lends to the public.

Answer 1

The Correct Option is B

Step 1: Understanding the Concept:
The Bank Rate is a tool used by the Central Bank (like RBI) to control the money supply and credit in an economy.
Step 2: Detailed Explanation:
1. The Central Bank acts as the "Banker's Bank". It does not deal with the general public (citizens).
2. When Commercial Banks face a shortage of funds, they borrow from the Central Bank.
3. The official interest rate at which the Central Bank lends long-term funds to commercial banks is called the Bank Rate.
4. By changing this rate, the Central Bank can make borrowing cheaper or more expensive for commercial banks, which eventually affects the interest rates for the public.
Step 3: Final Answer:
Bank Rate is the rate charged by the Central Bank on loans to Commercial Banks.