Issues facing monetary transmission

16 DEC,2019 | MEDC


 

India’s monetary policy has largely failed to translate into tangible economic growth for the country. The blame in this regard fallsmainlyon the stickiness of our monetary transmission mechanism. The recent rate cutting exercises of the RBI have not translated adequately into lower bank lending rates. It is well-known how the commercial banking system, which dominates the credit channel, responds immediately to interest rate increases but relatively slowly to a declining rate regime. There is a reason behind it. With the gradual collapse of trust and confidence in the usual credit channels – given the unabated accumulation of NPAs and the unravelling of dodgy governance practices by various players in the financial services sector – banks have become credit-averse. The bottom-line is that banks need credible projects to lend to, where they are assured of regular repayments. If this is not done soon, we risk freezing the flow of credit in the economy. Policymakers need to make a note of it and act accordingly.

 

*Photo Credit: Google

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