Bank rate is the rate at which the RBI extends credit to the
Last updated May 13, 2026
Correct Answer:
Option C —
Commercial Banks
The Bank Rate is the standard rate at which the Reserve Bank of India (RBI) is prepared to buy or re-discount bills of exchange or other commercial papers. In practical terms, it is the rate at which the RBI extends long-term loans and credit to Commercial Banks without any collateral.
Key Features of Bank Rate:
Long-term Tool: Unlike the Repo Rate (which is for short-term lending), the Bank Rate is typically associated with longer-term credit requirements.
No Collateral: Under the Bank Rate, banks do not need to pledge securities (like government bonds) to the RBI.
Monetary Policy Signal: It acts as a "penal rate." If a commercial bank fails to maintain its required reserves (like CRR or SLR), the RBI may charge a penalty linked to the Bank Rate.
Impact on Loans: When the RBI increases the Bank Rate, it becomes more expensive for banks to borrow. Consequently, banks raise the interest rates they charge to customers, which helps control inflation by reducing the money supply.
Why the other options are incorrect:
A & D: Lending to the Central or State Governments is usually managed through different mechanisms, such as Ways and Means Advances (WMA) or the issuance of Treasury Bills and Government Securities.
B: The RBI manages foreign exchange reserves and interacts with international bodies (like the IMF), but its primary "Bank Rate" is an internal tool for the domestic banking system.
Answer verified by Quintessence Classes faculty — Karan Nagar, Srinagar.
