During inflation the central bank adopts the Bank Rate Policy. During inflation prices raise and value of falls. Demand and market are contract. Investment declines, GNP, employment, per capital income, export are badly affected. Saving, government revenue and balance of payment are also badly affected.
Under such circumstances, the central bank raises the bank rate. It is a rate at which it provides credit to the commercial banks and banks get dear credit. They enhance the lending rate. They also increase the call rate (discount rate) and deposit rate. Banks create lesser loan and lesser credit comes into circulation. Higher deposit rate encourage saving and discourages consumption. Higher lending rate and deposit rate contract the supply of money. It has good effect on the economy. Prices begin the fall values of money rises. It is extent the demand as well as the market. So It promotes the investment and generates income. It increase per capital income, saving increases, taxable capacity increases and it increase the government revenue. Budget is balance, export boost up and improve the balance of payment. The rate of change also improves. Dear is economic development and employment level is full. So the objectives of monetary policy achieved.