Rising Asymmetries in Money Market Rates Threaten Monetary Transmission

Growing asymmetries in short-term money market rates are threatening the effectiveness of monetary transmission. And this isn't the view of a skeptic—it's the Reserve Bank of India (RBI) that has flagged this concerning trend.

- Tirthankar Mitra

Despite the RBI's efforts to inject liquidity into the system and adjust policy rates to guide economic momentum, the signals are failing to reach their intended targets.

The ripple effects could dampen credit flow, hinder inflation management, and erode overall economic confidence. At the core lies a clear disconnect between policy intent and its actual impact.

The money market rate—essentially the overnight interest rate that reflects the cost of very short-term funds in the banking system—is central to the issue. Complementing it are the market repo and tri-party repo rates, all crucial for the smooth functioning of India's money markets.

Ideally, these rates should align with the RBI's policy stance. When they don't, they create uncertainty and undermine the central bank's ability to influence borrowing costs across the economy.