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- The bank rate assumes the existence of a well knit and closely integrated money market. Such a market does not exist in the developing countries. Most commercial banks are foreign owned and they are virtually independent of the Central Bank. They have liquid resources of their owner and do not have to rely on re-discounting (get assistance from Central Bank).
- The bank rate assumes an indirect relationship between interest and investment. However reality has shown that businessmen will borrow even at high interest rates. Interest is only a minor element in the composition of the cost structure. Investment is thus insensitively related to the rate of interest.
- There is no direct relationship between the Central Bank and the other components of the money market hence the market interest rate rarely respond to the bank rate. The Central Bank has no control on the money lenders (black market) and other financial intermediaries such as merry- go- round, co-operatives etc.
- Sometimes owing to the risk involved there may be either a lack of borrowers or lack borrowers who are creditworthy applicants and require credit for purposes which are acceptable to the bank under the prevailing circumstances.
- Most developing countries Central Banks are directly influenced by politicians and sometimes the monetary policy can be dictated by these very politicians
Wilfykil answered the question on March 8, 2019 at 13:01
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