Q. The word “monetary transmission” often seen in news is related to which of the following?

[A] To contain growing Non-Performing Assets (NPAu2019s) of commercial banks.

[B] Providing timely credit for agriculture and other economically weaker sections.

[C] Smooth transmission of tax devolution to states from centre.

[D] The pass-through of the RBIu2019s rate actions to the economy at large.

Answer: D

Monetary transmission is the pass-through of the RBI’s rate actions to the economy at large.  

  • As you know, the RBI’s most important task is to keep tabs on inflation by adjusting money supply.  
  • It also monitors the exchange rate. To control all this, the RBI uses many monetary tools.  
  • The repo rate, reverse repo rate and cash reserve requirement are being the key instruments.  
  • Let us take the repo rate, for instance. This is the rate at which the RBI lends short-term funds to banks to manage their day-to-day operations.  
  • When the RBI wants to stimulate growth, it cuts the repo rate to reduce the cost of borrowings.  
  • Banks get money at a cheaper rate. If this is passed on to borrowers, then monetary transmission is said to have happened smoothly. 

Source: The Hindu