Reserve Bank is the only institution which can issue currency. The role of RBI is to lend money to all commercial banks at all times. This function of RBI is called lender of Last Resort. RBI influences money supply by buying or selling of bonds issued by the government in open market. When RBI  buys a government bond in the open market it pays for it by giving a cheque. This cheque increases the total amount of reserve in the economy and thus increases money supply. Selling of bonds by RBI decreases the money supply. When Central Bank buys the security this type of agreement is called repurchase agreement and the rate at which the money is lent in this way is called Repo Rate. RBI also influences money supply by changing the rate at which it gives loans to commercial banks called Bank rate.

Bank rate is defined as _____________.

The rate at which RBI gives loans to commercial banks

The correct answer is option (1) : The rate at which RBI gives loans to commercial banks

Bank rate : The rate of interest payable by commercial banks to RBI if they borrow money from the latter in case of a shortage of reserves.