Question
Download Solution PDFThe minimum rate below which banks are not allowed to lend money except in cases specified by the Reserve Bank of India is called ________.
Answer (Detailed Solution Below)
Detailed Solution
Download Solution PDFThe correct answer is base rate.
Key Points
- The Base Rate is the minimum interest rate of a bank below which it cannot lend, except in some cases allowed by the RBI.
- It is the minimum interest rate of a bank below which it is not viable to lend.
- The base rate, introduced with effect from 1st July 2011 by the Reserve Bank of India, is the new benchmark rate for the lending operations of banks.
- Thus all categories of domestic rupee loans should be priced only with reference to the Base Rate, subject to the conditions mentioned in RBI circulars dated April 9, 2010 and January 19, 2015.
- The reason for introducing Base Rate was to bring out the transparency in bank lending rates as well as to improve monetary policy transmission.
- Since the Base Rate will be the minimum rate for all loans, banks are not permitted to resort to any lending below the Base Rate.
Additional Information
- Reverse Repo Rate: It is the rate at which the RBI borrows money from commercial banks. It is used as a tool to control the money supply in the economy.
- Repo Rate: It is the rate at which the RBI lends money to commercial banks. It is also used to control the money supply and inflation.
- Cash Rate: This term is not relevant to India as it is used to refer to the interest rate set by the Reserve Bank of Australia.
Last updated on Jul 5, 2025
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