Bank Rate

The bank rate is the interest rate at which the Reserve Bank of India (RBI) lends long-term funds to commercial banks — without any collateral requirement — serving as a signalling tool for the overall direction of monetary policy. The bank rate is set by the RBI's Monetary Policy Committee (MPC) and is typically maintained at 25 basis points above the repo rate (the rate at which banks borrow short-term funds from the RBI against collateral). When the bank rate rises, borrowing becomes more expensive for banks, which pass on higher costs to borrowers through increased lending rates — tightening monetary conditions and slowing credit growth. Conversely, a lower bank rate signals monetary easing and stimulates credit expansion. In modern Indian monetary policy, the bank rate has become less prominent as an operational target — the repo rate is the primary policy rate actively used by the MPC to signal monetary stance, while the bank rate plays a secondary signalling role. The bank rate also serves as the penal rate applicable on certain defaults — banks that fail to maintain their SLR (Statutory Liquidity Ratio) requirement are charged a penal interest at the bank rate. For investors and economists monitoring Indian monetary policy, changes in the bank rate signal the RBI's medium-to-long-term interest rate outlook and are announced alongside the Monetary Policy Statement six times per year.