Bank Rate Policy
Introduction
Bank rate policy is an instrument of monitory policy. The central bank is responsible for a no. of objectives such an currency stability, financial stability, growth in employment and income etc. In monitory policy it is important to remember in the connection that price stability is closely connected with financial stability. Bank rate policy involving the changing at discount rate, so as to influence the market rate of interests. Which play a important roll in the creation of credit.
Bank rate policy
Bank rate in the rate which the central bank re discounts certain define bills and other eligiblepapers. The central bank of a country is the ultimate source of cash and in there for considered as Render of the best resort and Banker’s Bank. In this capacity it has to meet the genuin requrents of the bank. In times of emergency a central bank will be willing to extent rediscounting facilities to the bank provided. They offer short term assets which considered eligible for rediscounting by Central bank. A Central Bank extents such a facility only at price. This is technically known on Bank rate or discount rate.
The relationship between the bank rate and the market rate endows the central bank with the power to influence credit creation of banks. A high bank rate is likely to deference the total amount of money in circulation and a low bank rate to increase the total amount of the money in circulation. Thus whenever the central bank feels it necessary to decrease the total amount of money in circulation, it will increase the bank rate. This will be followed by an increase in the market rate. Higher market rates will discourage borrowing, resulting in a reduction of bank credit.
Mechanism of Bank Rate Policy
Let as assume that inflation conditions are existing in the economy. Here, the central bank intervening and raise the bank rate. This will increase the cost of browsing for the banks. Consequently the market rate will go up the increased market will discourage businessmen from browsing money. This will Check the business activity and unemployment will ensure the demand goods and services decrease because of the decrease in purchasing power of the people. This in turn, will affect the producer’s adversely. Further reduction in produce the result. A demand decreases price will ultimately comedown. Then an increase in the bank rate will be followed by a reduction in total amount of money and circulation, reduction in money income and prices and general slowing down of economic activities. Conversely a decrease in the Bank rate will be followed by a reduction in the market rate. This intern will be accompanied by increased borrowing, increased money income, increased price and expanded business activity.
Bank Rate policy under gold standard
Under gold standard, a variation in the bank rate will re-adjust, the internal cost price structure and will correct any disequilibrium in the balance of payment. Followed by loss of gold from a country owing to mall adjustment between export and import or by an ensure flow of capital owing to lower money rates priviting in that country. The central bank can check this by increasing bank rate. In short an increase in Bank rate will help the country to correct any adverse Balance of Payment.
Limitation of Bank Rate Policy
· The efficiency of bank rate policy depends to great extent, on its power to influence markets rate.
· It depends on the necessity of the commercial bank to approach the central bank.
· Elasticity in the economic structure on a country.
