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June 14, 2026
The Dispatch

Definition

Monetary Policy Transmission

Monetary policy transmission is the process by which RBI changes in the repo rate flow through to the lending and deposit rates banks actually offer.

When the RBI changes the repo rate, the intended effect is for bank loan and deposit rates to move in step. In practice transmission was historically slow and incomplete under the base rate and MCLR regimes, because deposit costs adjusted with a lag.

To speed transmission, the RBI mandated external benchmarks like the repo rate for retail and MSME floating loans (RLLR), so those rates now reset quickly. Transmission on the deposit side and on older MCLR loans remains slower, which is why the pass-through differs across a bank's book.

Related terms

  • MCLR (Marginal Cost of Funds Lending Rate)MCLR is an internal benchmark that determines the minimum interest rate at which a bank can lend, based on its cost of funds.
  • Repo-Linked Lending Rate (RLLR)RLLR is a lending rate tied directly to the RBI's repo rate, so changes in the repo rate quickly flow through to borrowers.
  • External Benchmark Lending Rate (EBLR)The External Benchmark Lending Rate is the rate at which banks price floating retail and MSME loans, linked to an external benchmark such as the RBI repo rate.
  • Repo RateThe repo rate is the interest rate at which the RBI lends short-term money to commercial banks, and it is the central bank's main tool to balance inflation and growth.

Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.