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The bank rate refers to rate at which the central bank (i.e RBI) rediscounts bills and prepares of commercial banks or provides advance to commercial banks against approved securities. It is "the standard rate at which the bank is prepared to buy or rediscount bills of exchange or other commercial paper eligible for purchase under the RBI Act". The Bank Rate affects the actual availability and the cost of the credit.
Any change in the bank rate necessarily brings out a resultant change in the cost of credit available to commercial banks. Managing the bank rate is a preferred method by which central banks can regulate the level of economic activity. Lower bank rates can help to expand the economy, when unemployment is high, by lowering the cost of funds for borrowers. Conversely, higher bank rates help to reign in the economy, when inflation is higher than desired.
If the  RBI increases the bank rate than it reduce the volume of commercial banks borrowing from the RBI. On the other hand the lowering of Bank Rate by the Reserve Bank of India leads to more liquidity in the market. The Bank Rate deters banks from further credit expansion as it becomes a more costly affair.