The lowering of Bank Rate by the Reserve Bank of India leads to:
Answer & explanation
Answer: (a) More liquidity in the market
The Bank Rate is what the RBI charges commercial banks when it lends to them. Cutting it makes these loans cheaper, so banks can borrow more and lend more. Money supply and liquidity in the market therefore rise.
- ✓ (a) A lower Bank Rate makes loans from the RBI cheaper. Banks can hold larger reserves and lend more, so money supply and liquidity rise.
- ✗ (b) Less liquidity follows from raising the Bank Rate, not lowering it. Costlier loans reduce banks' reserves and shrink money supply.
- ✗ (c) The Bank Rate is a quantitative tool of monetary policy. Changing it does alter money supply and liquidity.
- ✗ (d) The Bank Rate is the rate at which the RBI lends to banks, not a deposit rate. Its direct effect is on banks' cost of borrowing and on money supply, not on mobilising deposits.
Remember · Bank Rate down means cheaper RBI loans to banks, so more credit and more liquidity. Bank Rate up means costlier loans and tighter liquidity.
📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter)
Sources
- NCERT Class 12 · Introductory Macroeconomics, Chapter 3 “By increasing the bank rate, loans taken by commercial banks become more expensive; this reduces the reserves held by the commercial bank and hence decreases money supply. A fall in the bank rate can increase the money supply.”
Question: UPSC Civil Services (Preliminary) 2011, General Studies Paper I. Explanation: Minimalist IAS, checked 25 Oct 2026 (how we verify). ·
