Correct Option
An increase in the Bank Rate indicates that the Central Bank is pursuing a tight money policy. The Bank Rate is the rate at which the Reserve Bank of India (RBI) lends money to commercial banks without collateral for long-term purposes. When the Bank Rate is increased, it signals the Central Bank's intention to:
- Make borrowing more expensive for commercial banks, which in turn leads to higher lending rates for businesses and consumers.
- Reduce the overall money supply and credit availability in the economy.
- Curb inflationary pressures and discourage excessive consumption or speculative investments by restricting liquidity.
Incorrect Options
Option (a): An increase in the Bank Rate generally leads to a rise in the market rate of interest, as commercial banks pass on the higher cost of borrowing from the Central Bank to their customers. It does not cause market rates to fall.
Option (b): An increase in the Bank Rate does not imply that the Central Bank will cease making loans to commercial banks. Instead, it means that commercial banks will have to pay a higher interest rate for the funds borrowed from the Central Bank.
Option (c): An easy money policy, also known as an expansionary monetary policy, involves lowering interest rates, including the Bank Rate, to encourage borrowing, investment, and economic growth. An increase in the Bank Rate is characteristic of a tight money policy, which aims to restrict credit and reduce money supply.