Transmission Mechanism

noun (countable)

/trænsˈmɪʃən ˈmɛkənɪzəm/

The process by which changes in a central bank's policy interest rate propagate through the financial system — via bank lending rates, bond yields, exchange rates, asset prices, and expectations — to ultimately affect real economic variables such as output, employment, and inflation. In India, the RBI's monetary policy transmission has historically been slow and incomplete: a 2019 RBI Internal Study Group found a 44-basis-point pass-through to lending rates from a 100-basis-point repo-rate cut, prompting the shift to the External Benchmark-linked Lending Rate (EBLR) system from October 2019.

✍️ Usage in a UPSC answer

The shift from MCLR to the External Benchmark-linked Lending Rate regime in October 2019 was a deliberate institutional intervention to repair India's weak monetary policy transmission mechanism, ensuring that repo-rate changes were immediately and fully reflected in retail loan pricing rather than being absorbed by bank margins.

Synonyms

monetary policy pass-throughinterest rate channelcredit channelpolicy propagation mechanism

Antonyms

policy blockagetransmission impairmentmonetary disconnectcredit rationing (as impediment)

🌱 Word Family

transmit (verb), transmission (noun), monetary transmission (noun phrase), interest rate pass-through (related phrase), MCLR (related Indian acronym)

🔡 Root

Latin transmittere = to send across (trans- = across + mittere = to send); mechanism from Greek mēkhanē = machine, device

📜 Etymology

The phrase 'monetary transmission mechanism' was formalised in academic literature in the 1960s–70s, particularly by Milton Friedman's monetarist school and the IS-LM model refinements. It encompasses multiple 'channels' — interest rate, credit, asset price, exchange rate, and expectations — each carrying the policy signal to the real economy at different speeds and with different magnitudes. India's adoption of EBLR in 2019 was a structural reform specifically to improve the speed and completeness of this transmission.

🧠 Memory Hook

TRANSMISSION = the gears in a car that translate engine power to wheel movement. The RBI's repo rate is the engine; the transmission mechanism is the gear train that carries that signal to actual loan rates, investment, and inflation. A broken transmission (India pre-2019) means the engine revs but the wheels don't turn.

💰 Indian Economy 📖 Seen in: Indian Economy — Growth, Planning & De...

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