Policy transmission: Some fallacies

Across the world, the issue of transmission of monetary policy impulses (through the signalling rate) specifically through the interest rate channel warrants a debate. This is all the more relevant in the Indian context where there is a serious lack of understanding on this particular issue among various stakeholders. The moral of the story: Banks are often blamed for incomplete monetary policy transmissions! Let us understand what really is the economics behind it.

An understanding of how the policy transmission works is best deciphered from the asset-liability structure of banks. A cross-country analysis of asset and liability structure suggests that deposits