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.
An increase in the Bank Rate generally indicates that the
Asked in UPSC IAS 2013 · Topic: Money & Banking (Monetary Policy: Objectives, Instruments (quantitative and qualitative), and Transmission Mechanism)
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Answer: D. Central Bank is following a tight money policy
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