Correct Option
The Bank Rate is the interest rate at which the Reserve Bank of India (RBI) provides long-term credit to commercial banks without requiring collateral. When the RBI lowers the Bank Rate, it reduces the cost of borrowing for commercial banks. This encourages banks to borrow more from the RBI and subsequently increase their lending to businesses and consumers. The expansion of credit by commercial banks injects more money into the economy, thereby increasing the overall liquidity in the market.
Incorrect Options
Option (2): A decrease in the Bank Rate makes borrowing cheaper for commercial banks, leading to an expansion of credit and an increase in market liquidity, not a reduction.
Option (3): Monetary policy tools like the Bank Rate are specifically designed to influence liquidity conditions in the economy. Therefore, a change in the Bank Rate directly impacts market liquidity.
Option (4): While increased lending might indirectly influence deposit mobilization in the long run, the immediate and primary effect of a lowered Bank Rate is on the cost of borrowing for banks and the subsequent expansion of credit and liquidity in the market.