RAS question
The bank rate is defined as the rate at which RBI:
Correct answer: (D) Rediscounts bills of exchange and government securities.
The bank rate is the rate at which the Reserve Bank of India is prepared to buy or rediscount bills of exchange and eligible instruments, including rediscounting bills of exchange and government securities.
Explanation
Section 49 of the Reserve Bank of India Act defines the Bank Rate as the standard rate at which the Reserve Bank is prepared to buy or re-discount bills of exchange or other commercial paper eligible under the Act. Bank Rate operates through rediscounting, not deposit-taking, government lending, or foreign-exchange purchase. The RBI report also places Bank Rate in the monetary-policy corridor: Bank Rate is essentially a discount rate and was to change automatically with the repo rate under the reviewed operating framework. Bank Rate is aligned with the MSF rate, 25 basis points above the repo rate.
Why the other options are wrong
- (A) Accepting deposits from banks describes the liquidity-absorption side associated with reverse repo, whereas Bank Rate is a discount or rediscount rate.
- (B) Lending to the government is not the Section 49 definition of Bank Rate; the definition turns on RBI buying or rediscounting eligible bills and paper.
- (C) Buying foreign currency belongs to exchange-rate and foreign-exchange operations, not to the Bank Rate definition used in monetary-policy instruments.
Concept
Monetary-policy instruments form an important part of Indian Economy, especially how RBI rates differ by function. RAS repeats such definitions because close-looking terms like repo, reverse repo, MSF and Bank Rate are easy to confuse in prelims.