The correct option is 1 and 3 only.
Explanation
The Bank Rate is a traditional monetary policy instrument defined under Section 49 of the Reserve Bank of India Act, 1934. It serves as a benchmark rate for long-term lending by the central bank to the banking sector.
Statement-wise Analysis
- Statement 1 is Correct: The Bank Rate is the standard rate at which the Reserve Bank of India (RBI) is prepared to buy or re-discount bills of exchange or other commercial paper. In broader economic terms, it is the rate at which the RBI lends funds to commercial banks for long-term requirements.
- Statement 2 is Incorrect: The Bank Rate is a quantitative (general) tool of monetary policy. Quantitative tools, such as the Repo Rate, CRR, SLR, and Open Market Operations, regulate the overall volume of money and credit in the economy. Qualitative (selective) tools, such as margin requirements and moral suasion, control the direction of credit to specific sectors.
- Statement 3 is Correct: A fall in the Bank Rate reduces the cost of funds for commercial banks. Consequently, banks can lower their lending rates for borrowers. This makes loans cheaper, encouraging investment and consumption, which leads to an increase in the money supply in the economy.
Key Takeaway
The Bank Rate is a quantitative instrument used to influence the cost of long-term credit. Unlike the Repo Rate, which is for short-term borrowing against collateral, the Bank Rate does not typically involve the pledging of securities.