Bank Rate – This is the rate at which the RBI (India’s Central Bank) lends the money to other banks such as ICICI, SBI, Canara bank and so on. It also lends money to the financial institution such as LIC housing finance and others.
The Bank Rate signals the future of RBI’s interest rates in a long term. If the Bank Rate moves up then the interest also tends to move up and vice versa.
The banks and financial institutions borrow money from the RBI at a lower interest and make profit by lending it at a higher interest rate. Generally the banks borrow money from either RBI or the other banks who have surplus deposits. If the RBI hikes the bank rate, the interest that a bank pays for borrowing money increases. It, in turn, hikes its own lending rates to ensure it continues to make a profit.
How this affects us: If the RBI keeps the bank rate unchanged, we may not really be affected. But if it increases the bank rate, be prepared to pay more for any loan that we have taken from a financial institution.
The bank rate will gives us an idea of the RBI’s long term view of the economy. If the bank rate goes up, it means things are going to get more expensive in the long run.
Bank Rate is at 6% as of now. It has not changed from 2007 AFAIK.