1. Bank rate, as defined in the Section 49 of the RBI Act, 1934, the rate at which the RBI buys or rediscounts bills of exchange or other commercial paper presented by a scheduled bank, was historically aligned with short-term interest rates. 2. But direct refinancing facility from RBI like Bill re-discounting has been phased out. 3. Between 1935-50: [^2] 1. The Bank Rate, reserve requirements and open market operations were the monetary policy instruments for regulating the credit availability. 2. As the RBI followed a passive interest rate policy, the Bank Rate was used only once in November 1935 when it was reduced from 3.5 per cent to 3.00 per cent. Further, although the RBI was vested with adequate powers to resort to selective credit control, the need for it was not felt due to the prevalence of price stability. 4. Changes in Bank Rate: 1. The Bank rate remain unchanged between May 1957 and January 1963. 2. The Bank rate was fixed at 3.5% p.a in 1935 and after a few occasional changes it was increased to 12% in October, 1991 ## Reactivation of Bank Rate in 1997 1. ==March 1997 - The Internal Group on Bank Rate (1997) submitted its report.== 1. [Box 3.3 Internal Group on Bank Rate (1997)](RBI_History%20of%20The%20Reserve%20Bank%20of%20India%20(1997-2008)_Volume%20V.pdf#page=96) in History of The Reserve Bank of India (1997-2008) - Volume V 2. The bank rate which was dysfunctional was reactivated effective from ==[[RBI_Annual Report_1997.pdf#page=21&selection=12,0,31,1|April 16, 1997]]== to serve as a reference rate as well as an effective signalling mechanism to reflect the stance of monetary policy 3. To achieve this, interest rates of significance were linked to Bank Rate, and it was sharply used between 1998 to 2003, with the rate varying from 11% in April 1997 to 6% in April 2003. 4. Before this, application of the Bank Rate was confined to: 1. Ways and Means advances to State Governments, 2. advances to primary co-operative banks for SSI, and state financial corporations, 3. penal interest rates on shortfalls In reserve requirements. 5. ==[List](RBI_Annual%20Report_1997.pdf#page=21&selection=4,0,10,4) of all interest rates on advances from the Reserve Bank and the penal rates on shortfalls in reserve requirements which were linked to the Bank Rate== 1. Also, maximum term deposit rate (up to 1 year) of scheduled commercial banks was linked to the Bank Rate 6. After reactivation, Bank rate was reduced in 3 steps to: 1. 11% p.a. from 12% p.a. with effect from close of business on April 15, 1997, and to 2. 10% p.a. with effect from the close of business on June 25, 1997, 3. and to 9% by Oct-1997. 7. April 1, 1998 - WMA to central govt was provided at the Bank Rate. With this, WMA to both state and central govt were provided at Bank Rate. ## De-linking of Bank Rate ### Introduction of I-LAF-1999 1. The Interim Liquidity Adjustment Facility (I-LAF) was announced on [April 20, 1999](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=2263) 1. The general re-finance facility (discounting/rediscounting bills of exchange) introduced on April 26, 1997 was withdrawn effective April 21, 1999, and replaced by CLF and ACLF at Bank rate. 1. The Reserve Bank offered advances at Bank Rate against 1. G-Secs and other authorised securities (a facility which persisted into the mid-1990s); 1. This refinance facility _against government securities_ was withdrawn with effect from July 6, 1996 in the wake of the CRR reductions. 2. against demand promissory notes executed by banks supported by: 1. usance promissory notes/usance bills of their clients under the Bill Market Scheme of (1952-70) and the subsequent Bill Rediscounting Scheme; 2. export credit of various forms (since 1963); 3. agricultural credit, which, along with the funds under national funds for agriculture is presently largely routed through NABARD 4. import financing. 2. It also administered the Credit Guarantee Scheme, introduced in July 1960, to guarantee advances by banks and other institutions to small-scale industries. 2. [October 6, 1999](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=81) - Collateralised Lending Facility was revised 3. ECR facility - Scheduled commercial banks continued to have access to export credit refinance, which was made available at the Bank Rate with effect from [April 15, 1997](RBI_Annual%20Report_1997.pdf#page=36&selection=210,0,244,102). 4. Primary Dealers - Liquidity support against collateral of government securities continued at the Bank Rate (Level I), along with Additional liquidity support (Level II) at the Bank Rate+2% 5. <span style="background-color:#F0FFFF;">[I-LAF in the Annual Report 1999](RBI_Annual%20Report_1999.pdf#page=17&selection=153,0,155,29)</span> ### Introduction of LAF-2000 [April 27, 2000](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=2859) - Liquidity Adjustment Facility (LAF) was announced in the [Statement on Monetary and Credit Policy for the year 2000-01](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=2859) 1. The scheme was announced on [May 29, 2000](https://rbi.org.in/scripts/NotificationUser.aspx?Id=188&Mode=0) and the first stage of LAF was implemented from June 5, 2000. 2. Under the scheme, (i) Repo auctions (for absorption of liquidity) and (ii) reverse repo auctions (for injection of liquidity) were conducted on a daily basis (except Saturdays). Interest rates in respect of both repos and reverse repos were decided through cut off rates emerging from auctions on 'uniform price' basis conducted by the Reserve Bank of India, at Mumbai. 3. Additional Collaterialised Lending Facility (ACLF) - liquidity support at Bank rate extended to all scheduled commercial banks (excluding RRBs) was withdrawn 4. Level II - Refinance/reverse repos under Level II at bank rate was withdrawn. 5. Variable rate Repo auctions with the same day settlement were introduced replacing the Additional Collateralised Lending Facility (ACLF) to banks and Level II support to Primary Dealers (PDs) 6. ==Collateralised liquidity support for PDs, where PD-wise limits were based on certain norms relating to their commitments to RBI, and two schemes, viz., Export Refinance (ER) and Collateralised Lending Facility (CLF) for scheduled commercial banks. All these facilities (standing liquidity facilities) at Bank Rate continued as per the existing procedures.== 1. Collateralised Lending Facility  (CLF) was available to each scheduled commercial bank at a level of 0.125 per cent of its average aggregate deposits during the year 1997-98 and 2. export credit refinance to the extent of 50.0 per cent of the increase in its outstanding export credit eligible for refinance over the level of such outstanding as on February 16, 1996. 7. [April 19, 2001](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=2260) - In the statement by Dr. Bimal Jalan, Governor, Reserve Bank of India on Monetary and Credit Policy for the year 2001-2002, the following announcements were made: 1. The standing liquidity facilities available from RBI was split into two parts, viz., (i) normal facility and  (ii) back-stop facility.  2. Accordingly, the total quantum of support available to banks under CLF and export credit refinance, and the quantum of support available for PDs will be spilt into two components, i.e., normal facility and back-stop facility. 3. The normal facility will be provided at the Bank Rate. The back-stop facility will be provided at a variable daily rate, linked to cut-off rates emerging in regular LAF auctions and in the absence of such rates, to National Stock Exchange – Mumbai – Inter-bank Offer Rate (NSE-MIBOR) was used. 8. [May 3, 2001](https://rbi.org.in/scripts/NotificationUser.aspx?Id=370&Mode=0)- The second stage of LAF (known as LAF Scheme 2001-2002) was announced, effective from May 8, 2001. 1. In the second stage, it was envisaged (not fully implemented) to replace Collateralised Lending Facility (CLF) to banks and Level I support to PDs with variable rate Repo auctions. 9. [April 29, 2002](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=671) 1. In the Annual Monetary and Credit Policy for the year 2002-2003 , it was announced that with the development of inter-bank repo market and operationalisation of [[Outright Transactions in G-Secs in Secondary Market|CCIL]] , the standing facilities could be phased out with effect from the fortnight beginning October 5, 2002. 2. October 5, 2002 - The collateralised lending facility (CLF) available to scheduled banks was withdrawn [^1]. 3. ==With this, ECR facility remained as the only standing facility after the complete phasing out of CLF since October 5, 2002.== 10. [April 29, 2003](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=1203) 1. Monetary and Credit Policy for the year 2003-2004 announced on 29 April, 2003 reduced the bank rate by 0.25 percentage point from 6.25% to 6.00% with effect from close of business on April 29, 2003. 2. After this, the bank rate was kept unchanged. 3. This was mainly for the reason that monetary policy signalling was done through modulations in the reverse repo rate and the repo rate under the Liquidity Adjustment Facility (LAF) (till May 3, 2011) and the policy repo rate under the revised operating procedure of monetary policy (from May 3, 2011 onwards). 11. December 2, 2003 - Report of the [Internal Group on Liquidity Adjustment Facility](RBI_Group-Committee_20031202_Report%20of%20the%20Internal%20Group%20on%20Liquidity%20Adjustment%20Facility.pdf) was published 1. [Box VIII.2 - Internal Group on Liquidity Adjustment Facility](RBI_Annual%20Report_2004.pdf#page=133&selection=60,0,61,47) in RBI's Annual Report-2004 2. [Box 3.2 Internal Group on Liquidity Adjustment Facility (2003)](RBI_History%20of%20The%20Reserve%20Bank%20of%20India%20(1997-2008)_Volume%20V.pdf#page=89&selection=3,0,5,58) in History of The Reserve Bank of India (1997-2008)-Volume V 12. [March 25, 2004](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=1549), - Based on the Report of the [Internal Group on Liquidity Adjustment Facility'](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=4960) released on 13-Jan-2004, a revised LAF scheme was announced, effective from March 29, 2004 1. [Revised Scheme of LAF, effective from March 29, 2004](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=9906) 2. [Table 7.1: Features of the Revised Liquidity Adjustment Facility Scheme-March 2004](RBI_Annual_2007_VII.%20Statistics%20on%20Government%20Securities%20Market_Manual%20on%20Financial%20and%20Banking%20Statistics%20-%20March%202007.pdf) in the VII. Statistics on Government Securities Market/[Manual on Financial and Banking Statistics - March 2007](https://rbi.org.in/scripts/AnnualPublications.aspx?head=Manual%20on%20Financial%20and%20Banking%20Statistics%20-%20March%202007) 3. It was decided to rationalise the Standing Liquidity Facilities by merging the normal facility and back-stop facility into a single facility which will be made available at a single rate, viz., at the reverse repo rate. 4. In other words, the the entire quantum of Export Credit Finance (ECR) and liquidity support to PDs was made available at the repo rate. 5. Thus all the standing facilities were no longer based on the bank rate. 6. Bank rate remained unchanged at 6%. 13. With the introduction of LAF, monetary policy signalling moved away from administered rates like the Bank Rate and towards market-determined interest rates emerging from LAF operations. 14. [LAF Auctions from 2000](Liquidity%20Adjustment%20Facility%20(LAF).md#May%202000) >[!normal] ==**The first 3 Internal Groups on the Liquidity Adjustment Facility (LAF)**== >1. The first internal Group was constituted in May 1999 to examine the "Role of the Bank Rate". >2. The second internal Group gave recommendations on the new operating procedure and auction system in March 2001, which were announced in the monetary policy Statement of April 2001. >3. Both these groups helped to "operationalise" the LAF. The [recommendations](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=4960#L24:~:text=Annexes-,Annex%20I%20%3A,-Recommendations/Action%20Taken) were implemented as shown below. >4. The third group, set up of which was announced in the Mid-Term Review of Monetary and Credit Policy for 2003-04, on November 3, 2003, submitted its [report](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=4960#L24) in November 2003, and was published on 13-Jan-2004 on RBI's website. With this a revised LAF scheme was introduced on 29-March-2004. ### De-linking of other advances by RBI from Bank Rate 1. Pursuant to the budget announcement 1992-93, a policy decision was taken by Reserve Bank of India (RBI) to transfer larger share of its profits to the Union Government. Accordingly, RBI discontinued the practice of appropriating large amounts from its profits to the 1. 2 long-term funds (GLC-I and GLC-II) maintained by National Bank for Agricultural and Rural Development (NABARD) and 2. the National Industrial Credit (Long-Term Operations) (NIC-LTO) Fund and 3. National Housing Credit (Long-Term Operations) Fund maintained by RBI. 4. NABARD's General Line of Credit (GLC) with RBI ceased to exist in 1992. 2. The loans/advances out of the NIC(LTO) Fund to SIDBI was discontinued from 1992-93. 1. State Financial Corporations receive refinance facility from SIDBI. 3. _State Co-operative Banks (SCBs) towards general banking business such as clearing adjustments, liquidity_ _etc._ 1. [September 30, 2011](https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=6741&Mode=0)- Effective October 1, 2011, the rate was changed to Repo rate 4. Refinance for Primary (Urban) Co-operative Banks for SSI 1. It was discontinued before October 5, 2002. 5. ==Bank Rate is now just used to calculate the penalty on default in the cash reserve ratio (CRR) and the statutory liquidity ratio (SLR), which has been effective since April 16, 1997.== 6. **Bank Rate & Interest Payment on CRR** 1. [April 2001](RBI_MPS_200104_FY2001-02.pdf) - In the annual policy statement of April 2001, it was announced that at a subsequent stage, interest would be paid at the Bank Rate on eligible cash balances maintained with RBI under the CRR requirement. 2. [Oct 22, 2001](RBI_Notification_20011022_Maintenance%20of%20Cash%20Reserve%20Ratio(CRR)%20-%20Section%2042(1)%20of%20the%20Reserve%20Bank%20of%20India%20Act,%201934.pdf) - Interest rate on eligible balances was linked with the Bank Rate 1. With effect from the fortnight beginning November 3, 2001, all Scheduled Commercial Banks were to be paid interest at the Bank Rate on eligible cash balances maintained with Reserve Bank under provision to Section 42(1) and 42(1A) of Reserve Bank of India Act, 1934. 3. [Sept 11, 2004](Cash%20Reserve%20Ratio%20(CRR).md#^99754e) - **RBI de-linked the rate of interest from Bank Rate for interest payments on eligible CRR balances** (just to recall, interest was paid on eligible cash balances maintained with RBI under CRR requirement, that is between prescribed rate and 3%, and no interest was payable on any amount actually maintained in excess of the balance required to be maintained) from Bank Rate, and fixed (reduced) it, to a rate lower than repo rate, that is at 3.5% p.a, with effect from September 18, 2004. 7. **Bank Rate and Ways and Means (WMA)** 1. April 1, 2006 and [April 4, 2006](RBI_Press%20Release_20060404_Revised%20Scheme%20of%20Ways%20and%20Means%20Advances%20(WMA)%20to%20State%20Governments-2006-07.pdf) - The interest rates on [Ways and Means (WMA)](Ways%20and%20Means%20(WMA).md) and overdrafts for central government and state governments were linked to the repo rate (as against the Bank Rate earlier) respectively. ## Changes in Bank Rate 1. [Table 3.3 Changes in Bank Rate: 1997–98 to 2007–08](RBI_History%20of%20The%20Reserve%20Bank%20of%20India%20(1997-2008)_Volume%20V.pdf#page=98&selection=13,0,15,40) in History of The Reserve Bank of India (1997-2008) - Volume V ## 2011 1. [March 15, 2011](RBI_Group-Committee_20110315_Report%20of%20the%20Working%20Group%20on%20Operating%20Procedure%20of%20Monetary%20Policy_Chairman-Deepak%20Mohanty.pdf) - In the Report of the Working group on Operating Procedure of Monetary Policy (Chairman-Deepak Mohanty), it was suggested: 1. that Bank Rate be activated as a discount rate (with a liquidity facility linked to it, later known as [Marginal Standing Facility (MSF), 2011](Marginal%20Standing%20Facility%20(MSF),%202011.md)) with fixed spread over the repo rate. 2. <span style="background-color:#F0FFFF;">One of the terms of reference of this Group was to asses the role of the Bank rate</span> ## 2012 - Bank Rate aligned to MSF Rate 1. [13-Feb-2012](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=25954) - After a period of 9 years, the RBI aligned the bank rate with [Marginal Standing Facility (MSF), 2011](Marginal%20Standing%20Facility%20(MSF),%202011.md) rate, which in turn is linked to the policy repo rate under the LAF. 2. Henceforth, whenever there is an adjustment of the MSF rate, the Reserve Bank also considers and [[RBI_Annual Report_2012.pdf#page=98&selection=40,0,40,37|aligns the Bank Rate with the revised MSF rate]]. All penal interest rates on shortfall in reserve requirements, which are specifically linked to the Bank Rate, also would get revised. >*Further Reading:* >[Box 3.3 Internal Group on Bank Rate (1997)](RBI_History%20of%20The%20Reserve%20Bank%20of%20India%20(1997-2008)_Volume%20V.pdf#page=96&selection=17,0,17,38) in History of The Reserve Bank of India (1997-2008) - Volume V >[Box 1.4 Bank Rate](RBI_Annual%20Report_1997.pdf#page=21&selection=4,0,10,3) in Annual Report_1997 >[Bank Rate Before and After LAF](RBI_History%20of%20The%20Reserve%20Bank%20of%20India%20(1997-2008)_Volume%20V.pdf#page=95&selection=41,0,41,30) in History of The Reserve Bank of India (1997-2008)-Volume V >[Table 3.3 Changes in Bank Rate: 1997–98 to 2007–08](RBI_History%20of%20The%20Reserve%20Bank%20of%20India%20(1997-2008)_Volume%20V.pdf#page=98&selection=13,0,15,40) in History of The Reserve Bank of India (1997-2008) - Volume V >[Box III.3 - Bank Rate Alignment](RBI_Annual%20Report_2012.pdf#page=98&selection=40,24,40,25) in the Annual Report 2012 ## References ### [[Publications (Data Releases) & Research#Research|Research]] [Groups/Committees](Groups%20and%20Committees.md) 1. RBI. (May, 1999). The first internal Group was constituted in May 1999 to examine the "Role of the Bank Rate". 2. RBI. (March 15, 2011). ==Report of the Working group on Operating Procedure of Monetary Policy (Chairman-Deepak Mohanty)==. [Link](https://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=631) | [pdf](RBI_Group:Committee_20110315_Report%20of%20the%20Working%20Group%20on%20Operating%20Procedure%20of%20Monetary%20Policy_Chairman-Deepak%20Mohanty.pdf) ### [[Publications (Data Releases) & Research#Publications|Publications]] 1. [Box 3.3 Internal Group on Bank Rate (1997)](RBI_History%20of%20The%20Reserve%20Bank%20of%20India%20(1997-2008)_Volume%20V.pdf#page=96&selection=17,0,17,38) in History of The Reserve Bank of India (1997-2008) - Volume V 2. RBI. Annual Report for the year ended June 30, 1997. [[RBI_Annual Report_2013.pdf|pdf]] 3. RBI. Annual Report for the year ended June 30, 1999. [pdf](RBI_Annual%20Report_1999.pdf) 4. RBI. Annual Report for the year ended June 30, 2011. [[RBI_Annual Report_2011.pdf|pdf]] 5. RBI. Annual Report for the year ended June 30, 2013. [[RBI_Annual Report_2013.pdf|pdf]] [Groups/Committees](Groups%20and%20Committees.md) 1. RBI. March 1997. Internal Group on Bank Rate (1997). [pdf](RBI_History%20of%20The%20Reserve%20Bank%20of%20India%20(1997-2008)_Volume%20V.pdf#page=96&selection=17,0,17,38) 2. RBI. (March 15, 2011). Report of the Working group on Operating Procedure of Monetary Policy (Chairman-Deepak Mohanty). [pdf](RBI_Group-Committee_20110315_Report%20of%20the%20Working%20Group%20on%20Operating%20Procedure%20of%20Monetary%20Policy_Chairman-Deepak%20Mohanty.pdf) ### [Press Releases & Notifications](https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx) 1. RBI. (April 27, 2003). Statement on Monetary and Credit Policy for the year 2000-01. 2. RBI. (April 19, 2003). Statement on Monetary and Credit Policy for the year 2001-02. 3. RBI. (April 29, 2003). Statement on Monetary and Credit Policy for the year 2002-03. 4. RBI. (April 29, 2003). Statement on Monetary and Credit Policy for the year 2003-04. 5. RBI (February 13, 2012). RBI raises Bank Rate as a Technical Adjustment [^1]: [[RBI_Annual Report_2013.pdf|Annual Report-2013]] [^2]: RBI. (March 15, 2011). ==Report of the Working group on Operating Procedure of Monetary Policy (Chairman-Deepak Mohanty)==. [Link](https://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=631) | [pdf](RBI_Group:Committee_20110315_Report%20of%20the%20Working%20Group%20on%20Operating%20Procedure%20of%20Monetary%20Policy_Chairman-Deepak%20Mohanty.pdf)