The lowering of Bank Rate by the Reserve Bank of India leads to
[UPSC Civil Services Exam – 2011 Prelims]
(a) More liquidity in the market
(b) Less liquidity in the market
(c) No change in the liquidity in the market
(d) Mobilization of more deposits by commercial banks
Answer: (a)
Explanation:
- Bank Rate
- It is the interest rate at which a nation’s central bank lends money to domestic banks, often in the form of very short-term loans.
- When a bank suffers fund deficiency, it can borrow money from RBI to continue services.
- When Bank Rate is increased by the central bank, a commercial bank’s borrowing costs hikes, which reduce the supply of money in the market.
- Any reduction in the bank rate and the repo rate will lead to borrowers getting loans at lower interest rates.
- The lowering of the Bank Rate makes the domestic banks borrow money at a cheap rate which in turn increased the liquidity in the market.
