There is a decrease in Bank rate in an economy. Arrange the following statements relating to change in bank rate in the sequencing order :

(A) Loans taken by commercial bank become cheaper
(B) Increases money supply
(C) Bank rate is decreased by RBI
(D) Reserves held by commercial banks increases

Choose the correct answer from the options given below :

(C), (A), (D), (B)

The correct answer is Option 2 : (C), (A), (D), (B)

The correct sequence is:

• (C) Bank rate is decreased by RBI — The process begins with the Reserve Bank reducing the bank rate.
• (A) Loans taken by commercial banks become cheaper — As a direct result of the rate cut, the cost of borrowing for commercial banks from the RBI decreases.
• (D) Reserves held by commercial banks increases — Because borrowing is now less expensive, commercial banks tend to borrow more or maintain higher liquidity levels, which increases their overall reserves.
• (B) Increases money supply — With higher reserves, banks can lend more, leading to an increase in money supply in the economy.

Why Option D "(C), (D), (A), (B)" is not correct?

Option (C), (D), (A), (B) is not the best sequence because statement (D) is actually a consequence of statement (A). The reserves of commercial banks do not increase immediately just because the bank rate is reduced. They increase because commercial banks are able to borrow funds more cheaply from the RBI. Hence, (A) logically comes before (D).