How effective is RBI's monetary policy transmission

How effective is RBI's monetary policy transmission

Enabling effective monetary transmission would not only increase the credibility of the Central Bank but also help in strengthening the financial structure.

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Globally, countries have shifted from monetary policy tightening (2016 to early 2019) to monetary policy easing since March 2019 as per the Global Monetary Tracker which compiles monetary policy trend of 54 countries.Globally, countries have shifted from monetary policy tightening (2016 to early 2019) to monetary policy easing since March 2019 as per the Global Monetary Tracker which compiles monetary policy trend of 54 countries.
Dr Arun Singh
  • Oct 7, 2019,
  • Updated Oct 7, 2019 4:14 PM IST

Globally, countries have shifted from monetary policy tightening (2016 to early 2019) to monetary policy easing since March 2019 as per the Global Monetary Tracker which compiles monetary policy trend of 54 countries.

As per theory, at lower interest rates, people are expected to borrow and spend more, the more the money circulates in the economy, the greater would be the economic activity. Much, however, depends on how effectively, with respect to speed and quantum, the transmission mechanism works.

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The speed and quantam at which the central bank's policy rate changes passes on to the real economy vary widely across countries. It mainly depends on two factors - the structure of the economy and the state of its financial system. In India, the Reserve Bank of India (RBI) has been ahead of the curve in monetary policy easing, reducing the repo rate by 110 bps since Feb 19 as inflation has remained within the target range since Aug 2018.

This has been the steepest rate cut since 2000, with the exception in 2008-09, i.e. during the Lehman crisis. The urgency indicates that the RBI is looking at various ways and options to increase the commercial borrowings. The pass-through of the policy rate cut to the commercial interest rates will enable corporates to borrow at lower rates.

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To improve the transmission of the monetary policy to the bank lending rates, the RBI over the years have taken many measures which includes transitioning from the prime lending rate (PLR) system (1994) to the benchmark prime lending rate (BPLR) system (2003), the base rate system (2010), and the current marginal cost of funds-based lending rate (MCLR) system (2016).

Also Read:

Globally, countries have shifted from monetary policy tightening (2016 to early 2019) to monetary policy easing since March 2019 as per the Global Monetary Tracker which compiles monetary policy trend of 54 countries.

As per theory, at lower interest rates, people are expected to borrow and spend more, the more the money circulates in the economy, the greater would be the economic activity. Much, however, depends on how effectively, with respect to speed and quantum, the transmission mechanism works.

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The speed and quantam at which the central bank's policy rate changes passes on to the real economy vary widely across countries. It mainly depends on two factors - the structure of the economy and the state of its financial system. In India, the Reserve Bank of India (RBI) has been ahead of the curve in monetary policy easing, reducing the repo rate by 110 bps since Feb 19 as inflation has remained within the target range since Aug 2018.

This has been the steepest rate cut since 2000, with the exception in 2008-09, i.e. during the Lehman crisis. The urgency indicates that the RBI is looking at various ways and options to increase the commercial borrowings. The pass-through of the policy rate cut to the commercial interest rates will enable corporates to borrow at lower rates.

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To improve the transmission of the monetary policy to the bank lending rates, the RBI over the years have taken many measures which includes transitioning from the prime lending rate (PLR) system (1994) to the benchmark prime lending rate (BPLR) system (2003), the base rate system (2010), and the current marginal cost of funds-based lending rate (MCLR) system (2016).

Also Read:

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