Under Section 49 of the Reserve Bank of India Act, 1934, the Bank Rate has been defined as "the standard rate at which the Reserve Bank is prepared to buy or re-discount bills of exchange or other commercial paper eligible for purchase under the Act."
Bank rate is the rate at which central bank lends money to the commercial banks by buying their eligible rated securities - bills of exchange or commercial paper.
Bank Rate once used to be the policy rate (the key interest rate based on which all other short term interest rates move) in India. 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 is the central banker’s tool for controlling liquidity and inflation.
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.
Bank Rate is now aligned to Marginal Standing Facility (MSF) rate, the penal rate at which banks can borrow money from the central bank over and above what is available to them through theLAF window. In other words, MSF assumed the role of bank rate, once the latter became operational in 2011.
Since Bank rate has been aligned to the MSF rate, it changes automatically as and when the MSF rate changes, alongside policy repo rate changes. Accordingly, the penal interest rates levied on banks for not meeting their reserve requirements (which are specifically linked to the Bank Rate using a formula; i.e., Bank Rate +3 percentage points; Bank Rate +5 percentage points), also stand revised as and when the repo rate is revised.
Unlike other policy rates, the bank rate is purely a signalling rate and most interest rates are de-linked from the bank rate.
- Marginal Standing Facility (MSF)
- Statutory liquidity ratio (SLR)
- Cash reserve ratio (CRR)
- Liquidity Adjustment Facility (LAF)
- Base Rate
- Market Stabilization Scheme (MSS)
- Policy Rate
- Repo and Reverse Repo Rate