Page 2 - Lesson Note-47 (1)

Quantitative Measures

Bank rate: -

It is the minimum rate at which the central bank of a country gives credit
to the commercial banks to meet their long-term needs.

• During excess demand situation the Bank Rate is increased which

further increases the rate of interest charged by the commercial
banks while advancing loans to the general public.
• It makes the credit costlier and demand for bank money decrease.
• Money supply into the economy decreases and purchasing power
is curtailed.
• AD falls and excess demand situation is corrected.

The reverse is true in case of deficient demand.

Repo Rate: -

It is the minimum rate at which the central bank of a country gives
credit to the commercial banks against approved securities to meet
their short-term needs.

• During excess demand situation the Repo Rate is increased which

further increases the rate of interest charged by the commercial
banks while advancing loans to the general public.
• It makes the credit costlier and demand for bank money decrease.
• Money supply into the economy decreases and purchasing power
is curtailed.
• AD falls and excess demand situation is corrected.

The reverse is true in case of deficient demand.

Reverse Repo rate: -

It is the rate at which the commercial banks park their excess reserves
with RBI through purchase of RBI securities in order to earn extra
income on otherwise idle cash reserves.

• During excess demand situation Reverse Repo Rate is increased

that encourages commercial banks to park their surplus funds
with the central bank.
• The lending capacity and credit creation power of commercial
banks is squeezed resulting a decline money supply and
purchasing power in the hands of the public.
• AD falls and excess demand situation is corrected.