Which of the following indicators is/are used to observe the monetary transmission mechanism in the economy? 1. Weighted average lending rate 2. Weighted average domestic term deposit rate 3. 1-year median MCLR 4. SDF rate Select the correct answer using the code given below.
- (a)1 and 2 only
- (b)1, 2 and 3
- (c)3 and 4
- (d)4 only
Correct — B, 1, 2 and 3. Monetary transmission is judged by watching what happens to the rates banks actually charge and pay after the policy repo rate moves, and the Reserve Bank reports exactly the three measures listed. Its August 2026 policy statement is typical: 'In response to the 125-basis points (bps) cut in the policy repo rate cumulatively, the weighted average lending rate (WALR) of Scheduled Commercial Banks declined by 80 bps for fresh rupee loans, and 91 bps for outstanding rupee loans... On the deposit side, the weighted average domestic term deposit rate (WADTDR) on fresh deposits has declined by 63 bps while that on outstanding deposits has softened by 51 bps.' The 1-year median MCLR belongs to the same family, because under the Reserve Bank's Master Direction on interest rates 'all floating rate rupee loans sanctioned and renewed w.e.f. April 1, 2016 shall be priced with reference to the Marginal Cost of Funds based Lending Rate (MCLR) which will be the internal benchmark for such purposes' — so its movement is the pass-through into lending benchmarks. The SDF rate is not in that family at all: it is a policy rate the Monetary Policy Committee sets, an input to transmission rather than a measurement of it.
- (a)1 and 2 only — Drops the 1-year median MCLR, which is the standard lending-benchmark indicator in the Reserve Bank's own transmission table — floating-rate rupee loans have been priced off the MCLR since April 2016.
- (c)3 and 4 — Keeps the SDF rate, which the Monetary Policy Committee announces rather than observes, and throws away the two weighted average rates that are the core of any transmission assessment.
- (d)4 only — Names only the SDF rate. Setting a policy rate is the start of the transmission process; measuring it requires the deposit and lending rates that follow.
Monetary transmission is the chain by which a change in the policy repo rate travels outward — first into overnight and short-term money market rates, then into bond yields, and finally into the deposit and lending rates faced by households and firms. The last leg is the slowest and the least certain, so the Reserve Bank tracks it explicitly through the weighted average lending rate on fresh and outstanding rupee loans, the weighted average domestic term deposit rate on fresh and outstanding deposits, and the median one-year MCLR of banks.
The discriminating idea is the difference between an instrument and an indicator. Repo, SDF, MSF, CRR and SLR are instruments — the central bank sets them. WALR, WADTDR and the median MCLR are outcomes — the central bank watches them to see whether its instrument worked. Once the list is sorted that way, item 4 falls out on its own, and among the options only one both drops item 4 and keeps all three outcome rates. As of the August 2026 policy statement, transmission of a cumulative 125 basis point repo cut since February 2025 had reached 80 basis points on fresh lending rates and 91 basis points on outstanding ones, with the Reserve Bank itself noting that pass-through to fresh lending rates had moderated as credit demand stayed strong — a useful reminder that transmission is partial and slow rather than automatic.
- The Reserve Bank measures transmission through the WALR on fresh and outstanding rupee loans and the WADTDR on fresh and outstanding deposits.
- Floating-rate rupee loans sanctioned or renewed from 1 April 2016 must be priced off the MCLR, the internal benchmark whose one-year median is tracked for transmission.
- The SDF rate is announced by the Monetary Policy Committee alongside the repo rate — it is a policy instrument, not an outcome indicator.
- As of August 2026, a cumulative 125 bps repo cut since February 2025 had passed through as 80 bps on fresh WALR, 91 bps on outstanding WALR and 63 bps on fresh WADTDR.
- Treating any rate that appears in a policy statement as a transmission indicator, without asking whether it is set or observed.
- Forgetting the MCLR because newer loans are priced off an external benchmark; the one-year median MCLR is still reported.
- Confusing the WALR on fresh loans with the WALR on outstanding loans — they move by different amounts and at different speeds.
Asked as a select-the-indicators list in which one policy instrument is planted among genuine outcome measures.
What is/are the purpose/purposes of the 'Marginal Cost of Funds based Lending Rate (MCLR)' announced by RBI? 1. These guidelines help improve the transparency in the methodology followed by banks for determining the interest rates on advances. 2. These guidelines help ensure availability of bank credit at interest rates which are fair to the borrowers as well as the banks. Select the correct answer using the code given below:
- (a) 1 only
- (b) 2 only
- (c) Both 1 and 2
- (d) Neither 1 nor 2
Answer(c) Both 1 and 2
Why the MCLR exists at all, which is what makes it a transmission indicator here. UPSC asked it in the very year the framework began; the point that loan pricing had to become transparent and policy-sensitive is the reason the one-year median MCLR is watched.
- practice — not a real PYQ
The weighted average domestic term deposit rate (WADTDR) is used by the Reserve Bank chiefly to assess
- (a)the fiscal deficit of the Union Government
- (b)the pass-through of policy rate changes to bank deposit rates
- (c)the growth of foreign exchange reserves
- (d)the level of the wholesale price index
Answer(b) the pass-through of policy rate changes to bank deposit rates — it is a transmission indicator, not a policy instrument.
- practice — not a real PYQ
From which date were all floating-rate rupee loans required to be priced with reference to the MCLR?
- (a)1 April 2014
- (b)1 April 2016
- (c)1 October 2019
- (d)1 April 2022
Answer(b) 1 April 2016 — the Reserve Bank's Master Direction made the MCLR the internal benchmark for such loans from that date.