Arrange the following sequential stages of monetary policy transmission in India, from the initial Reserve Bank of India (RBI) policy rate action during an inflationary period to the ultimate macroeconomic impact, in the correct chronological order:
- 1The Reserve Bank of India raises the Policy Repo Rate and Cash Reserve Ratio (CRR) in its Monetary Policy Committee meeting.
- 2The Weighted Average Call Rate (WACR) in the money market shifts upward within the Liquidity Adjustment Facility (LAF) corridor.
- 3Commercial banks upwardly revise their External Benchmark Lending Rates (EBLR) and Marginal Cost of Funds-based Lending Rates (MCLR).
- 4Gross capital formation and private consumption growth moderate as credit availability tightens and borrowing costs increase.
- 5Headline Consumer Price Index (CPI) inflation decelerates toward the Reserve Bank's target mandate.
Cevap
The correct sequence begins with the RBI raising the Policy Repo Rate and CRR, followed by an immediate upward movement in the interbank Weighted Average Call Rate (WACR). Next, commercial banks transmit this policy signal by adjusting their lending rates (EBLR and MCLR). The resulting increase in overall borrowing costs leads to a moderation in private consumption and investment expenditure. Finally, reduced aggregate demand results in the deceleration of headline CPI inflation.
Monetary policy transmission follows a structured economic chain: Central Bank Policy Action → Financial Money Market Rates (WACR) → Commercial Bank Retail Rates (EBLR/MCLR) → Aggregate Demand Response (Consumption & Investment) → Macroeconomic Price Inflation.
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Monetary Policy Transmission Mechanism