MonPolicy → Quant Tools → Rates → Bank rate Flashcards
What is the main purpose of the Bank Rate in India’s current financial system?
It is primarily used to determine penalties on banks that do not maintain required reserve levels. It is less frequently used for lending functions.
Describe the primary difference between the MSF Rate and the Repo Rate.
The MSF rate is typically higher than the repo rate by a set percentage determined by the Monetary Policy Committee. The MSF also functions as an emergency source of funds for banks, while the repo rate is a tool to control overall money supply.
Which types of financial institutions have access to borrowing funds under the MSF?
Only scheduled commercial banks are eligible to borrow under the Marginal Standing Facility.
What is the key role of the repo rate within India’s monetary policy?
The repo rate is the primary tool used by the Reserve Bank of India (RBI) to control the money supply. The RBI influences borrowing and deposit interest rates in the economy by adjusting this rate, ultimately affecting economic activity.
In terms of collateral requirements, how does borrowing under the Bank Rate differ from borrowing under the Repo Rate or MSF?
Borrowers have the option of using collateral or not using collateral under the Bank Rate. When collateral is used, it can be securities from their Statutory Liquidity Ratio (SLR) holdings. In contrast, both the Repo Rate and MSF require government securities or treasury bills as collateral, and securities from the SLR cannot be used.
What is the traditional definition of the Bank Rate, as outlined in the RBI Act of 1934?
The Bank Rate is the standard rate at which the RBI buys or rediscounts first-class securities, bills of exchange, or other commercial papers.
“Rediscounting” refers to the RBI buying securities at a price (x) and reselling them at a higher price (y).
Why is the Bank Rate considered a dormant tool in India’s current financial system?
The introduction of the Repo Rate in the 2000s has replaced the Bank Rate as the primary tool for lending and borrowing.
As a result, the Bank Rate is used less frequently by the RBI and commercial banks.
Explain two potential discrepancies found in reference materials regarding the present-day operational status of the Bank Rate.
Collateral: Some sources state the Bank Rate requires no collateral, while others claim it accepts both government securities/treasury bills and private company securities as collateral.
Loan Duration: Some sources describe Bank Rate loans as long-term, while others offer no specific duration.
Despite discrepancies in how the Bank Rate functions today, what is its primary role within the Indian financial system?
While rarely used for lending, the Bank Rate is mainly used to determine penalties for commercial banks that fail to maintain the required reserve ratios.
