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Discuss the concept of monetary transmission mechanism. Explain in what way it can facilitate RBI in ensuring the pass-through of its policy decisions.

Topic: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

1. Discuss the concept of monetary transmission mechanism. Explain in what way it can facilitate RBI in ensuring the pass-through of its policy decisions. (250 words)

Economic Times

Why this question:

The question is based on the concept of Monetary transmission and the article provides a detailed analysis of the concept as applied to the Indian economy.

Key demand of the question:

Explain and discuss the concept of monetary transmission in detail, explain its importance to the context of Indian economy.

Directive:

Discuss – This is an all-encompassing directive – you have to debate on paper by going through the details of the issues concerned by examining each one of them. You have to give reasons for both for and against arguments.

Structure of the answer:

Introduction:

Define what Monetary transmission mechanism is.

Body:

The monetary transmission mechanism is the process by which asset prices and general economic conditions are affected as a result of monetary policy decisions. Such decisions are intended to influence the aggregate demand, interest rates, and amounts of money and credit in order to affect overall economic performance.

The traditional monetary transmission mechanism occurs through interest rate channels, which affect interest rates, costs of borrowing, levels of physical investment, and aggregate demand. Additionally, aggregate demand can be affected through friction in the credit markets, known as the credit view. In short, the monetary transmission mechanism can be defined as the link between monetary policy and aggregate demand.

Monetary transmission is the process through which RBI’s policy actions reach its effective end goal of tackling inflation and addressing growth concerns.

Take hints from the article and explain why monetary transmission is important to Indian context.

Conclusion:

Conclude with the benefits of inculcating such mechanism.