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Question

Which among the following represents the effective monetary policy transmission?

A Banks increasing the lending rate, when RBI reduces the Repo rate. Correct Answer Incorrect Answer
B Banks reducing the lending rate, when RBI reduces the Repo rate. Correct Answer Incorrect Answer
C Banks increasing lending rate, when RBI reduces the Reverse Repo rate. Correct Answer Incorrect Answer
D Banks increasing the lending rate and deposit rates, when RBI reduces both Repo and Reverse Repo rate. Correct Answer Incorrect Answer

Solution

Effective or complete monetary policy transmission implies banks passing on the benefits of RBI”s policy to the borrowers/public. It means that if RBI reduces the Repo and Reverse Repo rate, this will increase the money supply or banks can borrow from the RBI at lesser rates. This benefit of reduced. Repo and Reverse Repo rate is transmitted to public by reducing the lending rates to borrowers. Hence, only statement b is correct.

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