Rate of interest is determined by commercial banks.

Commercial banks play a crucial role in determining the rate of interest in an economy. They act as intermediaries between savers and borrowers and are responsible for allocating funds from savers to borrowers. The rate of interest charged by commercial banks on loans and earned on deposits is influenced by various factors, including:

1. Money Supply:
The rate of interest is affected by the supply of money in the economy. When there is an excess supply of money, banks may lower the interest rates to encourage borrowing and stimulate economic activity. Conversely, when there is a shortage of money, banks may increase the interest rates to discourage borrowing and control inflation.

2. Demand for Credit:
The demand for credit from borrowers also affects the rate of interest. If there is high demand for loans, banks may increase the interest rates to maximize their profitability. On the other hand, if there is low demand for loans, banks may lower the interest rates to attract borrowers.

3. Cost of Funds:
Commercial banks acquire funds from various sources, including deposits, interbank borrowing, and capital markets. The cost of these funds influences the rate of interest charged by banks. If the cost of funds is high, banks may increase the interest rates to maintain their profitability. Conversely, if the cost of funds is low, banks may lower the interest rates to remain competitive.

4. Reserve Bank Policy:
The central bank, such as the Reserve Bank of India, sets the benchmark interest rate known as the repo rate. Commercial banks borrow funds from the central bank at this rate. The repo rate serves as a guide for commercial banks in determining their lending and deposit rates. Changes in the repo rate by the central bank can directly influence the rate of interest charged by commercial banks.

5. Risk Factors:
Commercial banks assess the creditworthiness and risk profile of borrowers before granting loans. Higher-risk borrowers may be charged a higher rate of interest to compensate for the increased risk. Similarly, lower-risk borrowers may be offered a lower rate of interest.

In conclusion, commercial banks play a significant role in determining the rate of interest based on factors such as money supply, demand for credit, cost of funds, central bank policies, and risk factors. These factors collectively influence the interest rates charged by commercial banks, which in turn impact borrowing and investment decisions in the economy.