Bank Rate and monetary policy

Bank Rate (discount rate) is the rate at which the central bank lends to commercial banks. An increase in Bank Rate makes borrowing costlier for commercial banks, which then pass on this cost to their customers by raising lending rates. This reduces credit availability and money supply in the economy, which is characteristic of tight money policy aimed at controlling inflation. Option (a) is incorrect as market interest rates rise, not fall. Option (b) is incorrect as the RBI continues to lend but at higher rates. Option (c) is the opposite of what an increase in Bank Rate represents. > Bank Rate ↑ = Tight Money = Anti-inflationary = Contractionary Policy.