Monetary Policy Review 2015

Date: April 08, 2015

Monetary Transmission RBI Cash Reserve Ratio (CRR) Monetary policy

RBI kept rates unchanged in Monetary policy review

The RBI in its second monetary policy review of the financial year 2015-16 has kept the repo rate unchanged at 7.5% and kept the Cash Reserve Ratio (CRR) at 4%. In the first monetary policy meeting of the financial year 2015-16,the Reserve Bank of India has cut the interest rates it charges borrowing banks by 50 basis points.The RBI governor said that the monetary transmission hasn’t yet taken place, so there is no need to cut rates further.

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Monetary Transmission: Monetary Transmission is the process through which the changes in monetary policy gets reflected in the real economy. So, for instance, if a central bank reduces interest rates it charges borrowing banks, it would expect that reduction to be passed on to eventual customers as a result of the monetary transmission process. Usually, there is a lag between the actions of the central bank and those of the commercial banks. The lag is less when central banks raise interest rates.The effectiveness of monetary transmission, the process by which the central bank’s policy signals influence the financial markets, is a function of both tangible and intangible factors. It depends on the depth and efficiency of the financial markets. It also depends on the overall confidence and sentiment in the financial system.Typically, monetary transmission in emerging economies tends to be slower, reflecting shallow financial markets and inefficient information systems.

Improving monetary transmission is important if the Reserve Bank’s efforts at promoting growth with price stability are to be effective.