Monetary transmission refers to the process by which a central bank’s monetary policy signals (like repo rate) are passed on, through financial system to influence the businesses and households.
There are many monetary policy signals by the RBI; the most powerful one is the repo rate. When repo rate is changed, it brings changes in the overall interest rate in the economy as well. As a result of a decrease in repo rate, the interest rate on loans by banks also changes and this encourages consumption and investment activities of businesses and households. In an economy, both consumption and investment are often financed by borrowings from banks. As the repo rate brings changes in market interest rate, the repo rate channel is often referred as interest rate channel of monetary transmission.
