Bank Rate
The rate at which the central bank lends to commercial banks without collateral, for medium to long-term or emergency needs — one of RBI's tools for controlling money supply and rates.
In plain language
Central banks lend money to commercial banks in more than one way. The repo rate is one route: short-term, and only against securities pledged as collateral.
Bank Rate is a different route. The workbook describes it as the rate the central bank charges when it lends to commercial banks without any collateral, for medium to long-term needs or for emergencies. It sits alongside repo, reverse repo, CRR and SLR as one of the central bank's tools for managing money supply and interest rates.
How it works
The workbook's own contrast is precise: "Repo Rate is applied when the central bank is lending against securities, Reverse Repo is when it is borrowing money against securities. Bank Rate on the other hand is the rate at which the central bank lends money to commercial banks without any collateral for medium to long term or some emergency needs."
Because it is uncollateralised and longer-tenor, Bank Rate is used more sparingly than the repo rate — repo transactions are the everyday mechanism for managing short-term liquidity, while Bank Rate is reserved for medium-to-long-term or emergency funding.
A worked example
A bank facing an unusual, longer-term liquidity shortfall — say, an unexpected surge in withdrawals that cannot be met through the usual overnight repo window — borrows Rs 500 crore from the central bank under the Bank Rate facility, without pledging any securities as collateral, for a defined medium-term period.
Contrast that with a bank simply managing its everyday overnight cash position, which would instead borrow through repo, pledging government securities against the loan and repaying the next day. Same lender, same borrower, two different tools for two different needs.
Why NISM asks about it
Chapter 5.3.7 (Monetary Policies and their Impact on Economy) lists Bank Rate immediately after Repo and Reverse Repo, and immediately before CRR and SLR. Expect a question testing which of these tools is collateralised and which is not, and which is short-term versus medium-to-long-term.
Common exam traps
- Bank Rate is uncollateralised; repo is collateralised. This is the distinction the workbook draws most directly, and the one an exam question is most likely to test.
- The workbook does not give a current numeric value for Bank Rate anywhere in this chapter. Do not assume or state a specific rate unless the question itself supplies one.
Where this is taught
Free preparation for NISM Series XVRelated terms
- CRRThe minimum percentage of a bank's total deposits that it must hold as cash reserves with the central bank, earning no interest — one of RBI's tools for controlling money supply.
- Monetary policyThe central bank's management of money supply and interest rates to promote growth and hold prices stable — expansionary when it wants to push the economy up, contractionary when it wants to cool it.
- Repo rateThe rate at which the central bank lends money to banks for a very short term against approved securities — the main lever it pulls to make money cheaper or dearer.
- Demand-pull inflationInflation caused by demand running ahead of the supply available to meet it — too much money chasing too few goods.
- Gross Domestic ProductThe market value of all final goods and services produced inside a country's borders in a period, whoever owns the producer — the standard measure of the size and growth of an economy.
- InflationA sustained general rise in the price level, which erodes what a rupee buys — and the reason a nominal return has to be deflated before it means anything.
- Reverse repoThe transaction where the central bank borrows money from banks against securities, paying interest on it — the mirror image of a repo, where the central bank instead lends.
- SLRThe minimum percentage of a bank's total deposits it must hold in cash equivalents such as government securities and gold, rather than as cash — a companion tool to CRR.