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To understand a particular quotation from a play, you really have to look at it in context, considering what has happened before the scene you are referring to and who the character is talking to.
So, in Act III scene 1 we are presented with a Shylock who is distraught. Jessica, his only beloved daughter, has fled his household to elope with a Christian. Not only this, but she also stole his safebox. This massive loss in his life serves to heighten his desire to gain revenge on Antonio for all that he has suffered as a Jew. Shylock seems to focus all of his pent up anger and distress on Antonio, repeating again and again the phrase "Let him look to his bond" to emphasise how determined he is to take his "pound of flesh." In response to Salerio's comment that he will not surely take the pound of flesh, for what use would it be, he responds with your quote:
To bait fish withal. If it will feed nothing else, it will feed my revenge. He hath disgraced me, and hindered me half a million, laughed at my losses, mocked at my gains, scorned my nation, thwarted my bargains, cooled my friends, heated mine enemies; and what's his reason? I am a Jew.
Being in such a vulnerable position and still hurting terribly because of his daughter's desertion, Shylock now is ever the more eager to gain some kind of relief or comfort from exacting revenge on Antonio, who he sees as his enemy, because he has disparaged and treated him badly because of his race. Even if he just uses Antonio's flesh to bait fish, it will still "feed" his desire for revenge and his thirst to get even in some way and make up for the massive emotional loss he has suffered.
Shylock is a Jew who hates Antonio, for a number of reasons. When Antonio's ship is lost at sea, it is believed that Antonio has perished with the sea vessel.
Shylock's hatred for Antonio is obvious when he his questioned as to what he would do with Antonio's flesh if he had the opportunity. This is where the quote is used.
First Shylock says he would use Antonio's flesh for baiting fish, showing his complete disdain for the corpse of his enemy. If the fish aren't interested in eating the "bait," Antonio's death will feed Shylock's dire need for revenge against him. Shylock goes on to list the many ways the dead man has insulted him and impeded his financial success: such as laughing at him, interfering with his business dealings, and, above all, being a Christian.
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