Economics • Banking & FinanceEasy
What does 'Base Rate' signify in the Indian banking system history?
A. The minimum interest rate below which commercial banks were not permitted to lend.✓ Correct Answer
B. The rate at which the central bank lends short-term funds to commercial banks.
C. The interest paid by banks on savings bank account deposits.
D. The statutory reserve requirement maintained in liquid assets.
💡 Solution & Explanation
The Base Rate system was introduced by the Reserve Bank of India to serve as the minimum benchmark interest rate below which commercial banks were prohibited from lending to any customer. This mechanism replaced the older Benchmark Prime Lending Rate system to improve transparency in credit pricing. It was subsequently superseded by the Marginal Cost of Funds based Lending Rate framework.
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