What is bank rate policy? How does it work as a method of credit control?
The rate at which the Central Bank lends money to the commercial banks, is termed as bank rate and the policy of regulating flow of credit by changing bank rate is bank rate policy. To reduce credit, the Central Bank increases the bank rate which also increases the market rate of interest. It discourages the borrowers to borrow loans and reduces the credit creation power of commercial banks. On the other hand, to increase the supply of credit, the Central Bank reduces the bank rate. In this way, the Central Bank uses bank rate policy as a method of credit control.