Economics • Banking & FinanceMedium
What does the term 'Base Rate' signify in the context of Indian banking lending rates prior to the introduction of MCLR?
A. The minimum interest rate below which a bank is not permitted to lend to its customers.✓ Correct Answer
B. The average cost incurred by a bank in raising funds through current and savings accounts.
C. The interest rate charged by the RBI on short-term loans given to commercial banks.
D. The maximum rate ceiling imposed on microfinance loans.
💡 Solution & Explanation
The base rate established by the Reserve Bank of India in 2010 served as the mandatory floor interest rate below which commercial banks could not extend loans. It was subsequently replaced by the Marginal Cost of Funds based Lending Rate system to improve monetary transmission efficiency. Central banking lending benchmarks are high-priority topics for banking examinations.
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