The Bank Rate is defined under Section 49 of the RBI Act of 1934 as the standard rate at which the Reserve Bank of India (RBI) is willing to buy or rediscount bills of exchange or other commercial papers eligible for purchase. It serves as an important tool for regulating long-term funds borrowing by commercial banks from the RBI.
Functions and Purpose
Long-Term Borrowing Rate
- Banks utilize the Bank Rate when borrowing funds from the RBI for an extended period.
- It indicates the cost of borrowing for banks from the central bank.
Penalty Rates
- While the Bank Rate itself is not primarily used to control money supply, penal rates are linked to it.
- If a bank fails to meet the Statutory Liquidity Ratio (SLR) or Cash Reserve Ratio (CRR) requirements, the RBI imposes penalties. These penalties are typically 300 basis points above the prevailing Bank Rate.
Implementation and Impact
- Monetary Policy Tool: Though the Bank Rate directly influences the cost of funds for banks, its impact on money supply is indirect compared to other tools like the repo rate.
- Adjustments: The RBI periodically reviews and adjusts the Bank Rate to align with its monetary policy objectives, economic conditions, and inflationary pressures.
- Financial Stability: It plays a role in maintaining financial discipline among banks by linking penalties for non-compliance with SLR and CRR requirements to the Bank Rate.