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MONETARY POLICY TRANSMISSION (Concerns associated with ineffective…
MONETARY POLICY TRANSMISSION
Background
Monetary transmission refers to the process by which a central bank’s monetary policy signals (like repo rate) are passed on, through financial system to influence the businesses and households
In India, policy rate changes by RBI are not reflected in the base rates of banks regularly
monetary policy actions are felt with a lag of 2-3 quarters on output and with a lag of 3-4 quarters on inflation, and the impact persists for 8-12 quarters
Concerns associated with ineffective monetary policy transmission
RBI is unable to achieve its mandate effectively
Economic situation remains out of control
Inflation hurts the marginalized
Negative signals to the investors
Uncertainties in business cycle
Ineffectiveness of Fiscal Policy
Reasons for a lag in monetary transmission in India
Overdependence on banks
Locking of bank funds
Double Financial Repression: Pressure on banks due to locking of funds in government securities (SLR) and cash reserves (CRR).
Priority Sector Lending- creates additional burden on banks to lend on a priority basis
Increasing Non Performing Assets
Sub-optimal performance of MCLR system
as per report by by Janak Raj Committee, the transmission
was uneven across borrowing categories
was asymmetric over monetary policy cycles
Way Forward
Need for shifting to external benchmark based lending rate system
Reduce constraints on bank lending through Priority Sector Lending norms
Discouraging 'administered interest rate' savings schemes by the government
Insolvency process needs to be further strengthened using the IBC, to resolve the NPA problem of banks