Notes of bank rate - Economics

Give notes Bank rate

 Answer:

1) Bank Rate

 Bank Rate is considered to be the oldest and most effective means of controlling the decline of the Central Bank. This is because changes in bank rates have an immediate effect on the number of currencies in the economy. Therefore, the central bank rate is used as a numerical tool to control the decline. 

Explanation:

1) "Bank rate is the rate at which the central bank lends money to commercial banks." 2) "The rate at which the central bank restructures the merchant bank's dowry is called the bank rate.

Market rate: "The interest rate at which commercial banks lend to the borrower is called the market interest rate."

There is a close relationship between bank rates and market rates and they are interdependent. Also, the market rate is always higher than the bank rate. This is because commercial banks make a profit by borrowing from the central bank and paying a higher rate to the borrower.

Changes in bank rates directly affect market interest rates • and changes in interest rates directly affect borrowing. And borrowing has an effect on the amount of money in the economy, which means that there is an inverse relationship between bank rates and the demand for money.

Bank rates are raised when the central bank wants to reduce the amount of money in the economy. As a result, market interest rates rise and loans become more expensive. Due to high-interest rates, people ask for fewer loans from commercial banks. As a result, the credit formation of commercial banks decreases and the amount of money in the economy decreases.

Conversely, when the central bank wants to expand credit Or increase the amount of money in the economy. Then the bank rate falls. As a result, commercial banks lower their interest rates. As a result, more and more people are seeking loans from commercial banks. Commercial banks generate a large amount of credit from their mortgages. So the amount of money in the economy increases. In short, the central bank changes the bank rate with the help of this tool

By increasing the amount of money according to the situation in the economy.

This will automatically control the merger of the merchant bank.

2) Repo Rate :

The repo rate is a concept in the central bank's bank rate. The repo rate is the rate at which the central bank lends money to a commercial bank for a short period of time. There is not much difference between the bank rate and the repo rate, so the repo rate is not considered a means of credit formation.

3) Reverse repo rate:

In the economy, reverse repo rates are as important as bank rates and repo rates. "The reverse repo rate is the rate at which the central bank borrows from a commercial bank. The rate is called the reverse repo rate." In short, the central bank controls the credit formation of the merchant bank

By creating proper coordination between bank rate, market rate, repo rate, and reverse repo rate The amount of money in the economy fluctuates.

Another implication of the bank rate is that with the increase in the bank rate, the restructuring rate of the dowry increases. Therefore, commercial banks do not send much dowry to the central bank. This leads to a decrease in cash flow. On the other hand, a decline in the restructuring rate has led to an increase in the money supply by boosting hundi transactions.

Bank limit:

Although bank rates are the most effective means of controlling the central bank's decline, they have some limitations. Those limits can be stated as follows. 

1.  If there is a lack of favorable conditions in the economy, the bank rate policy does not have the desired effect.
2. The success of the Central Bank's Bank Rate Policy Depends on the cooperation. 
3.  The more successful the bank rate policy is in controlling inflation. That's all Does not succeed in times of recession. Producers are reluctant to invest despite receiving low-interest rates.
4.  The success of the bank rate depends on the cash held by the merchant bank. If the commercial banks keep more money in cash than they need, the bank rate will not be successful.
5.  The success of a bank depends on the flexibility of the economy. If wage rate, prices, cost of production, etc. are flexible then bank rate policy is successful otherwise if it is inflexible then success is not achieved.

In short, although there is an error in controlling the fall of a commercial bank with the help of a banker as mentioned above, it is a fact that the central bank does not have any other effective tool besides this one.