Discount Rate

Discount rate is the rate on which listed banks borrow the money from the Central Bank (State Bank) for fulfilling their short term needs.
One common term of “Lender of Last Resort” is used for the Central Bank which is basically accessible on this rate.
Listed Banks normally consider the option of borrowing the short-term money from Central Bank as the last option due to the following reasons

· This rate is usually higher than money market rate which is basically the platform created by all the banks for fulfilling their short term needs.
· As said “Lender of Last Resort” due to the fact that Central Bank keeps the strict check and balance to that needy bank

Apart from the above fact, this rate still has an importance. This rate basically helps for quoting Interbank offered rate which is LIBOR for international Loans, TIBOR for Japan’s local loans, HIBOR for Hong Kong’s local loans and KIBOR for Pakistan means every country has interbank offered rates which are revised on daily basis. These rates are quoted for 1-week, 2-week, 1-month, 3-months, and 6-months, 9-months, 1-year, 2-years, and 3-years.
Now when a customer goes to a bank for a loan then that bank quotes a certain rate which is basically interbank offered rate + x (x is its margin or risks in bank’s terminology attached to a particular loan)
Up to a certain extend this rate does have an impact on controlling the inflation. When A particular country is in excess of money in its economy then central bank more likely can increase this rate and vice versa.
On the other hand lesser the discount rate higher the local and foreign investment in the country due to the above mentioned fact of interbank offered rate and it is obvious that higher the foreign investment higher the appreciation (demand) of your country’s currency.