BANK RATE OPEN MARKET OPERATION

54.  BANK RATE

OPEN MARKET OPERATION

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

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.