Department Of Technical Education

Andhra Pradesh
Name Staff Member : P. BADARINARAYANA
Designation : Sr. Lecturer
Branch : DCCP
Institute : Govt. Polytechnic, NELLORE
Year/Semester : VI Semester
Subject : Banking-II
Sub. Code : CCP-604(B)
Topic : functions of RBI
Duration : 50 Mts.
Sub Topic : Bank Rate Policy
Teaching Aids : Animations
CCP604(B)42 1
Objective
On completion of this period we would be able
to
 comprehend the Bank Rate Policy of the
RBI.

CCP604(B)42 2
Recap

 In the last lesson you have seen that by some

Quantitative and some Qualitative methods, the
RBI controls the credit policy of the Country.
 Today you will see what are those methods.

CCP604(B)42 3
 Credit Control

The RBI is the controlled of credit in india. It controls

the credit available in the market thought different
methods they are
 Quantitative methods
 Qualitative methods

CCP604(B)42 4
Credit Control

The quantitative methods of controlling

credit are
1. Bank rate
2. Open market operations
3. variations of CRR
The qualitatitives method include the selective credit
control systems

CCP604(B)42 5
Bank Rate
 The Bank Rate is the rate of interest, which is
charged by the RBI on its advances to
commercial banks.
 When the RBI desires to restrict expansion of
credit, it RAISES the bank rate thereby making
the credit costlier to commercial banks, who
resort to borrowings from it for their lending
operations.

CCP604(B)42 6
Bank Rate…

 Commercial banks in turn increase their

lending rates on advances.
 A high rate of interest acts as a discouraging
factor and the borrowers consequently reduce
their level of borrowings from commercial
banks.

CCP604(B)42 7
Bank Rate…
 Similarly, in times of depression when the problem
is to encourage the banking system to create more
credit, the RBI REDUCES THE Bank Rate,
 Thereby accommodating the commercial banks in
the country on liberal scale.

CCP604(B)42 8
Bank Rate…

 Bank rate is one of the quantitative credit control

instrument used by RBI to control the credit flow
in the market
 There are certain limitations to the effectiveness
of bank rate to control the credit in the market
They are
1. Absence of bill market
2. unorganized nature by of our money
market

CCP604(B)42 9
 Bank Rate…

1. Absence of close relationship between bank and

other rates in the money market
2. Existence of wide disparity in interest rates and
3. Excess liquidity of the bank system together with
the reluctance of banks to approach the RBI

CCP604(B)42 10
Summary

 We have seen the bank rate policy of the RBI.

 The limitations to the effeteness of bank rate
policy

CCP604(B)42 11
Quiz

1.Bank Rate means

A. Rates of prices of commodities.
B. Rates of Consumer articles.
C. Rate of interest on loans and advances.
D. Taxi/auto rates in cities.

CCP604(B)42 12
Quiz
2. To facilitate more loans to banks, the RBI
a) Raises the bank rate
b) Reduces the bank rate
c) No change in the bank rate
d) changes the directors

CCP604(B)42 13
Frequently Asked Questions

 What are the quantitative methods of RBI

to control credit?
 What is bank rate? How it effects the
economy?

CCP604(B)42 14