Bank rate policy:
The bank rate is the rate of
interest at which
BB re-discounts
the first class bills of
exchange from
commercial banks. Whenever BB wants to reduce credit, the bank rate
is raised and
whenever the volume of bank credit is to
be expanded the bank rate
is
lowered. This is because by change in the bank rate.
BB seeks to
influence
the cost of bank credit.
The efficacy of bank rate policy depends,
to a greater extent,
on its power to influence
the market rates. There
is
no organized money market in our country and
thereby the market
rates
seldom respond to bank rate
changes. The absence of any
kind of conventional
relationship between
the central bank and other components of the
money market further adds
to the ineffectiveness of the bank rate
policy
Open Market Operations:
The Central Bank buys or sells ((on behalf of the
Fiscal
Authorities (the Treasury)) securities to the banking and non-banking
public (that is in the open market). One
such
security is Treasury
Bills. When the Central
Bank sells securities, it reduces the supply of
reserves and when
it buys
(back) securities-by redeeming them-it increases the
supply of reserves to the Deposit Money
Banks, thus affecting the supply of money.