An increase in the Bank Rate generally indicates that the

[UPSC Civil Services Exam – 2013 Prelims]

(a) Market rate of interest is likely to fall

(b) Central Bank is no longer making loans to commercial banks

(c) Central Bank is following an easy money policy

(d) Central Bank is following a tight money policy

Answer: (d)        

Explanation:

• Bank rate refers to the rate at which the Central bank lends money to its clients for the long term.
• An increase in this rate means that the Central bank is following a tight monetary policy as an increase in rates will lead to a decrease in money supply thereby leading to a decrease in inflation and a reduction in investment.
• Hence option 4 is correct.
• Cash Reserve Ratio – a specific part of the total deposit that is held as a reserve by the commercial banks and is mandated by the Reserve Bank of India (RBI).
• Reverse Repo Rate – rate of interest that is provided by the Reserve bank of India while borrowing money from the commercial banks.