What Is The Discount Policy Or Bank Rate Policy?

The central bank mainly relies on open market operations to regulate the volume of member bank reserves. However the importance of discount policy in controlling the bank credit is also considerable importance.  Discount policy refers to the conditions under which banks are permitted to borrow from the central banks discount window including the rate of interest charged on these loans.  Discount policy thus covers the volume of central bank loans given to the member banks and the rate charged on these loans. The member banks whenever they are short of reserves, borrow from the central bank by issuing first class bills of exchange. The rate of interest charged by the central bank on the loans to member banks is called discount rate.

Discount rate refers to that official rate which the central bank of a country is prepared to rediscount the first class bills of exchange. Discount rate which is also called as bank rate is different from the market rate. Market rate is the rate at which the money market is willing to discount bills of exchange. It is established by interaction of forces of supply and demand for the bills of exchange by the joint stock, discount houses.