BANK RATE

Bank Rate

• Under Section 49 of the Reserve Bank of India Act, 1934, the Bank Rate has been defined as ‘the standard rate at which the Reserve Bank is prepared to buy or re- discount bills of exchange or other commercial paper eligible for purchase under the Act’. 
• The bank rate once used to be the policy rate in India i.e. the key interest rate based on which all other short term interest rates moved. Discounting/rediscounting of bills of exchange by the Reserve Bank has been discontinued on introduction of Liquidity Adjustment Facility (LAF).
•  As a result, the bank rate has become dormant as an instrument of monetary management. The bank rate has been aligned to the Marginal Standing Facility (MSF) rate and, therefore, as and when the MSF rate changes alongside policy repo rate changes, the bank rate also changes automatically. 
• Briefly put, MSF assumed the role of bank rate and currently the bank rate is purely a signalling rate and most interest rates are delinked from the bank rate. Now, bank rate is used only for calculating penalty on default in the maintenance of Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR).