An increase in the Bank Rate generally indicates that the
- A market rate of interest is likely to fall
- B Central Bank is no longer making loans to commercial banks
- C Central Bank is following an easy money policy
- D Central Bank is following a tight money policy
Show Answer
The correct answer is D.
- An increase in the Bank Rate refers to the Central Bank (RBI in India) raising its benchmark policy rate. This generally indicates that the Central Bank is adopting a tight or contractionary monetary policy stance.
- A tight money policy is followed to curb excess demand and control inflation in the economy. Tools used for tightening include increasing bank rates along with other rates like repo rate, reverse repo rate etc. that make borrowing expensive.
- Option A is incorrect because market interest rates typically follow an upward trend in response to higher bank rate signals.
- Option B is invalid since bank loans are not stopped.
- Option C incorrectly refers to an easy money/expansionary policy while bank rate hikes reflect tightening.
Therefore, option D accurately states that a hike in bank rate indicates that the Central Bank is following a contractionary or tight money policy to control inflation by discouraging borrowing and spending.
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