In central banking and monetary policy, what is meant by the bank rate?

Introduction / Context:
Bank rate is a classic term in monetary economics and central banking. Competitive examinations and interviews frequently ask candidates to define it and distinguish it from other policy rates such as repo rate or reverse repo rate. Understanding bank rate is important because it signals the stance of monetary policy over a longer horizon and influences the structure of interest rates in the economy, even if other operational rates are used more actively in modern frameworks.

Given Data / Assumptions:

• The context is a central bank such as the Reserve Bank in India.
• Commercial banks sometimes borrow from the central bank or get their eligible bills and securities rediscounted.
• The bank rate is an administered rate decided by the central bank.
• The question is about definition, not about the current numerical value.

Concept / Approach:
Traditionally, bank rate is defined as the standard rate at which the central bank is prepared to buy or rediscount approved bills of exchange or lend to commercial banks without collateral such as repo style transactions. It is often considered a long term policy rate and can influence other interest rates like deposit and lending rates. When the central bank raises the bank rate, borrowing from it becomes more expensive, signalling tighter monetary conditions. The correct option must therefore mention lending by the central bank to commercial banks or rediscounting, not rates paid on deposits or stock returns.

Step-by-Step Solution:
Step 1: Recognise that the party setting the bank rate is the central bank, not a commercial bank. Step 2: Recall that this rate applies to loans or rediscounting of eligible paper that the central bank extends to commercial banks. Step 3: Understand that it is considered a benchmark or reference rate in the interest rate structure. Step 4: Compare the options and select the one that clearly states that bank rate is the rate at which the central bank lends to commercial banks or rediscounts their bills. Step 5: Reject options that refer to customer deposit rates, commission charges or stock market returns, which are unrelated to the central bank role.

Verification / Alternative check:
To verify, consider how central banks describe the term in their own publications. They usually say that bank rate is the rate at which the central bank is willing to buy or rediscount bills of exchange or make longer term loans to commercial banks. Changes in bank rate historically influenced the cost of funds for banks and thus the lending rates they charged customers. Even though many modern systems now use the repo rate as the main operational instrument, bank rate still exists as a signalling and penalty rate. This aligns with the definition given in the correct option.

Why Other Options Are Wrong:
Option B is wrong because it describes the interest rate on savings deposits paid by commercial banks to customers, which is a retail rate, not a central bank policy rate. Option C refers to a specific service charge on letters of credit, not a general policy rate. Option D confuses bank rate with interest rates on government savings schemes, which are set through different processes. Option E is clearly incorrect because equity share returns depend on profits and market prices, not on any officially declared bank rate by the central bank.

Common Pitfalls:
A common mistake is to treat bank rate, repo rate and savings rate as if they were the same concept. Another pitfall is to think that bank rate is the interest rate that commercial banks pay to customers, because of the word bank. Students may also memorise the current numerical value of bank rate but forget the underlying definition, which can change over time. Concentrating on the relationship between the central bank and commercial banks helps keep the concept accurate in exams and interviews.

Final Answer:
It is the rate of interest at which the central bank lends funds or rediscounts eligible bills for commercial banks, usually as a long term policy rate.