Increase in bank rate/repo rate acts as a warning-signal to the commercial banks to maintain healthy reserves of their vault cash (caution money to sustain their liabilities related to demand deposits). When the vault cash increases, the capacity to create credit is reduced. Accordingly, supply of money is reduced.
Explain above lines.
Dear student,
Bank rate refers to the rate at which the central bank provides loans to the commercial banks. An increase in the bank rate increases the cost of borrowing for the commercial banks. This in turn discourages the demand for loans and credit in the market. This leads to fall in the money supply.
Bank rate refers to the rate at which the central bank provides loans to the commercial banks. An increase in the bank rate increases the cost of borrowing for the commercial banks. This in turn discourages the demand for loans and credit in the market. This leads to fall in the money supply.