An increase in the Bank Rate generally indicates that the:
Answer & explanation
Answer: (d) Central Bank is following a tight money policy
The Bank Rate is the price the RBI charges banks for its loans. When it goes up, banks find such borrowing costlier, hold fewer reserves and lend less, so money supply shrinks. This is a tight (contractionary) monetary stance.
- ✗ (a) A higher Bank Rate raises banks' cost of funds, so market interest rates tend to rise, not fall.
- ✗ (b) A higher Bank Rate does not stop the RBI from lending. It only makes those loans more expensive.
- ✗ (c) An easy money policy lowers the Bank Rate to expand money supply. A rise points the other way.
- ✓ (d) Costlier loans from the RBI reduce commercial banks' reserves and credit. This is a tight money policy.
Remember · Bank Rate up means costlier RBI loans, less money supply and credit (tight policy). Bank Rate down means an easy policy.
📘 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) 2013, General Studies Paper I. Explanation: Minimalist IAS, checked 25 Oct 2026 (how we verify). ·
