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MONETARY POLICY Role of Central Banlk PART 3 BY AYUSSH SANGHI
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Bank Rate * It refers to the official interest rate at which RBI provides loans to the banking system. It includes: * commercial /cooperative banks, * development banks etc. * Such loans are given out by: * direct lending or * by rediscounting (buying back) the bills of commercial banks and treasury bills.
Bank Rate * Hence, bank rate is also known as discount rate. * Bank rate is used as a signal by the RBI to the commercial banks on RBI's thinking of what the interest rates should be.
Objective of Bank Rate When RBI increases the bank rate, the cost of borrowing for banks rises k This credit volume gets reduced leading to decline in * This credit volume gets redtuced leading to decline in supply of money Thus, increase in Bank rate reflects tightening of RBI monetary policy
Repo Rate Repo rate, or repurchase rate, is the rate ak * This is done by RBI buying government bonds from ak banks with an agreement to sell them back at a fixed rate.
Objective of Repo Kate * Objective is to inject liquidity in the system. In case RBI wants to make it expensive for banks to borrow money, it increases the repo rate. Similarly, if banks want to make it cheaper for banks to borrow money, it reduces the repo rate.
Difference between Bank Kate and Repo Rate k Often seems Bank Rate and Repo Rate similar because in both of them RBI is lending to the banks. KS. * But Repo R ak to short-term loans and used for controlling the amount of money in the market.
Difference between Bank Kate and Repo Rate Bank Rate is a long-term measure and is governed by the long-term monetary policies of the RBI
Conclusion sk charges on the loans and advances that it extends to: commercial banks and other financial intermediaries. RBI uses this tool to control the money supply.