Bank rate (discount rate) refers to the interest rate at which the domestic banks borrow money from a nation's Central Bank based on the monetary policy of the country as a short-term loan.
Bank rate policy involving the variation of discount rates to influence the market rate of interest, which plays a crucial rate in the creation credit.
One of the functions of a central bank is to be a “lender of last resort.” Occasionally commercial banks have unexpected and immediate needs for additional funds. In such cases, central bank will make short-term loans to commercial banks in its distress.
When a commercial bank borrows, it gives the central Bank a promissory note drawn against itself and secured by acceptable collateral. Just as commercial banks charge interest on their loans, so too Central Bank charges interest on loans they grant to commercial banks. The interest rate they charge is called the discount rate.