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54. BANK RATE
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OPEN
MARKET OPERATION
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1.
Meaning
Bank
rate is the rate at which the Central Bank lends money to commercial banks by
discounting bills of exchange.
2.
Measures
a)
Central Bank raises the Bank rate to control credit and inflation in
the economy.
b)
Central Bank decreases the Bank Rate to boost the production and
investments activities in the economy.
3.
Effects
(a)
Increased Bank Rate increases the cost of borrowing as commercial banks
charge a higher rate of interest and the demand for credit will go down
(b)
Income in general will fall down and prices will also go down
(c)
Decreased Bank rate will boost both production and investment
activities in the economy.
(d)
Increased bank rates restricts credit and investments in the country
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Open
Market Operationimplies deliberate direct sales
and purchase of securities.
(a)
The Central Bank sells the
securities in the open market to decrease the money supply of the banks.
(b)
OMO lead to expansion of credit when
RBI buys securities.
(a) When RBI sells
securities in the open market, the credit creating base of the commercial
bank is reduced.
(b) When RBI purchases securities, the credit creation base of the
banks is increased.
(c) Decreased of money supply raises the interest rate.
(d) An increase in money supply of money through OMO reduces interest
rate.
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BANK RATE OPEN MARKET OPERATION
