Monetary Policy | Course Paper

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A Study on Monetary Policy Transmission Mechanism in India

“The Transmission of the Monetary

Policy Actions of the Central Bank is as

important as the Monetary Policy

itself without which the prime

objective of Inflation Targeting and

growth will be defeated”

Submitted By:

EE Group-7, Section-F

INDEX

1. Introduction…………………………………………………………...Page 2

2. Channels of Monetary Policy Transmission……………Page 2

3. Efficiency & Current Performance of Monetary Policy

Transmission………………………………………………….…Page 2,3,4

4. Issues with Monetary Policy Transmission

……………….…………………………..…………………………………..Page 4

5. Recommendations…….……………………………………………Page 5

6. References………….………………………………………………….Page 5

Economics Environment

Monetary Policy Transmission

Introduction: Monetary Policy Transmission Mechanism

With the amendment of the RBI Act in 2016 which implemented the recommendations of the Urjit R.

Patel Committee Report, “Inflation targeting while keeping in mind the objective of growth” became the

prime objective of the RBI. For RBI to achieve its mandate effectively, it is of utmost important that the

mechanism of Monetary Policy Transmission works seamlessly. Without an efficient Transmission

Mechanism in place, the prime objectives of inflation targeting as well as growing at the potential output

would eventually be defeated undermining the efficacy of the central bank. To achieve its objectives RBI

employs several monetary policy tools such as Liquidity Adjustment Facility, Marginal Standing Facility

and Open Market Operations (OMOs). The most significant monetary policy tool that reserve bank uses

is changing of the repo rate i.e. the overnight borrowing or lending rate with commercial banks. Monetary

policy transmission is the entire process starting from the change in the key policy rates like repo rate to

pass-through to various money market rates such as call money rates, to the bank deposit and lending

rates culminating in its impact on inflation and growth.

Channels of Monetary Policy Transmission

The important channels of Monetary Policy Transmission in India are:

i) Interest Rate Channel: This is the strongest channel of Monetary Policy Transmission in India.

The immediate impact of changes in the key policy rates like repo rate is felt on the short-term money

market rates and key financial markets rates. These changes in interest rates, in turn, brings changes in

banks’ cost of funds i.e. the deposit and the lending rates. Lowering the repo rate, in turn, lowers the