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date: 18 November 2019

Abstract and Keywords

This article focuses on how the institutional structure of the financial sector and the role of financial intermediation in the Indian economy affect the transmission of monetary policy to the real economy. The article reviews a large amount of empirical literature on monetary transmission within the Indian context (with bank lending and the credit channel being more prevalent). One aspect that emerges from this discussion is that the effect of monetary disturbances on market interest rates, output, and prices, depends on the response of such disturbances to the yield curve. However, recent research on emerging markets shows that long-term rates are not responsive to changes in short-term rates. Thus, monetary policy has smaller effects on output and prices in emerging markets. In the Indian context, the shortcomings of the transmission mechanism further arise because of an underdeveloped financial system and the problem of credit rationing by formal sector banks.

Keywords: monetary policy, institutional structure, financial sector, Indian economy, monetary transmission, market interest rates

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