Arrange the following sequential steps in the transmission mechanism of an expansionary monetary policy initiated by the Reserve Bank of India (RBI), starting from the initial policy action to the final impact on the real economy:
- 1The Reserve Bank of India reduces the policy Repo Rate.
- 2Commercial banks lower their Marginal Cost of Funds Based Lending Rate (MCLR).
- 3Cost of credit for private businesses and individual borrowers decreases.
- 4Aggregate consumption and business investment expenditure increase.
Cevap
The correct sequence of monetary policy transmission begins with the RBI reducing the Repo Rate, followed by commercial banks lowering their lending benchmark (MCLR), which lowers borrowing costs for loans, and ultimately leads to an increase in consumption and investment expenditure in the economy.
Monetary policy transmission follows a clear chronological path: first, the central bank reduces the policy Repo Rate; second, commercial banks adjust their marginal cost of funds-based lending rates (MCLR) downwards; third, loan interest rates for businesses and retail consumers become cheaper; and fourth, lower borrowing costs spur aggregate consumption and investment expenditure in the economy.
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Monetary Policy Transmission Mechanism