Money and Banking (part – II)

The concept of the bank rate may vary in different economies based on monetary policy frameworks. Here are some variations:

1. Nominal Bank Rate: This is the stated rate of interest inflation into account. It reflects the without taking percentage at which banks borrow from the central bank, unaffected by inflationary pressures

2. Effective Bank Rate: The effective bank rate reflects the actual cost of borrowing for commercial banks, taking into account compounding effects and other hidden costs.

3. Discount Rate: In some countries, particularly the United States, the term "discount rate" is used in a similar context. The Federal Reserve lends to banks at the discount rate. Although different from the bank rate in a technical sense, both have similar functions of influencing monetary policy.

4. Penal Rate: Sometimes, a higher rate than the standard bank rate is applied to banks when they borrow beyond a prescribed limit or fail to maintain required reserves. This is known as the penal rate.

The concept of the bank rate may vary in different economies based on monetary policy frameworks. Here are some variations:

1. Nominal Bank Rate: This is the stated rate of interest inflation into account. It reflects the without taking percentage at which banks borrow from the central bank, unaffected by inflationary pressures

2. Effective Bank Rate: The effective bank rate reflects the actual cost of borrowing for commercial banks, taking into account compounding effects and other hidden costs.

3. Discount Rate: In some countries, particularly the United States, the term "discount rate" is used in a similar context. The Federal Reserve lends to banks at the discount rate. Although different from the bank rate in a technical sense, both have similar functions of influencing monetary policy.

4. Penal Rate: Sometimes, a higher rate than the standard bank rate is applied to banks when they borrow beyond a prescribed limit or fail to maintain required reserves. This is known as the penal rate.

Commercial banks, at times of financial crunch, seek short-term funds from the central bank of a country (RBI in the case of India) to tide over the financial crisis. For providing these funds, RBI levies interest on the amount that is lent to the commercial bank.

This rate of interest is better known as the repo rate. Repo rate is technically a repurchase agreement in which the commercial banks offer securities such as Treasury Bills to the RBI in return for short-term funds. The banks also agree to repurchase those securities at a predetermined price.

Reverse repo rate is said to be that rate of interest at which the central bank (RBI in India) borrows money from the commercial banks for a short term. It helps the central bank to have a ready source of liquidity at the time of need. RBI offers great interest rates in return for the amount supplied by the commercial banks.

Commercial banks also keep the excess funds that they receive with RBI as it is considered safe. The added benefit is that RBI will also pay interest, which gives the banks an option to earn interest on their idle money.

Bank rate refers to the rate at which a central bank lends money to commercial banks or financial institutions within its jurisdiction. It is considered a benchmark rate for lending within the banking sector and serves as a tool for regulating liquidity and influencing interest rates in the economy. The bank rate is typically higher than other policy rates and is used to signal the central bank's monetary policy stance.

Key Features:

• Long-term lending: Unlike the repo rate, which deals with short-term borrowing (overnight or short-term liquidity needs), the bank rate is applied to long-term loans.
• No collateral: Central banks lend to commercial banks at the bank rate without any collateral.
• Influence on other rates: Changes in the bank rate affect other interest rates in the economy, including lending rates for consumers and businesses.

Hence, option (b) is the correct answer.

As per Section 7 (1) of RBI Act, the Central Government may from time to time give such direction to the RBI as it may, after consultation with the Governor of the RBI, consider necessary in the public interest. However, there is no such provision given in the Constitution of India. Hence, statement 2 is incorrect.

As per Section 7 (3) of RBI Act, the Governor and in his absence the Deputy Governor nominated by him in this behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank. Hence, statement 3 is correct.

At present, shaktikanta Das is the Governor of the RBI . He was appointed on 12 December, 2018 as the Governor of the RBI.