MONETARY TRANSMISSION

Subject: Economy

Context :High incidence of non-performing assets (NPAs) in banks acts as a major roadblock in transmission of monetary policy actions of the Reserve Bank, a working paper prepared by the officials of the central bank said.

Concept :

• The working paper also made a strong case for capital injection in state-owned banks, arguing that such a move would increase the credit flow to the real sector in addition to ensuing smoother transmission of monetary policy.

  Monetary Transmission:

• Repo rate is the interest rate that the RBI charges the banks when it lends them money.
• The banks’ lending rate is the interest rates that banks charge from customers when they take a loan.
• By cutting the repo rate, the RBI has been sending a signal to the rest of the banking system that the lending rates in the system should come down.
• This process of repo rate cuts leading to interest rate cuts across the banking system is called “monetary policy transmission”.