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What is Bank Rate?
The minimum rate of interest, which a central bank charges (in India's case - Reserve Bank of India), while lending loans to domestic banks is called "Bank Rate". 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.
As RBI controls the money supply in the economy as well as in the banking sector, deciding the bank rate is usually done quarterly to control inflation and India's exchange rates as part of Monetary Policy action. There is no predetermined schedule per se. As of January 2021, the Bank Rate decided by the RBI is at 4.65 per cent.
When a bank rate changes, it can influence every sphere of the Indian economy, whether in the stock market or while applying for a car loan.
Bank Rate vs MCLR vs Repo Rate
Bank Rate is also known as “Discount Rate”, but it is sometimes confused with the Marginal Cost of Funds Based Lending Rate, commonly referred to as MCLR, which is the minimum interest rate below which financial institutions can't lend.
Also, there is a slight difference between Bank Rate and Repo Rate. In Repo Rate, RBI lends money to the banks against securities for the short term only, usually when there is a liquidity crunch in the economy. The opposite of this is Reverse Repo Rate when banks park funds with the central bank due to surplus liquidity in the market.
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