Read the below statements marked as Assertion (A) and Reason (R). Mark the correct option:
Assertion (A): Financial intermediaries are essential in transmitting monetary policy to the real economy.
Reason (R): They adjust lending and deposit rates in response to policy rates set by the MPC.
Show answer & explanation
Correct answer: A
Explanation
The correct answer is option 1 i.e. Both A and R are true, and R is the correct explanation of A.
Financial intermediaries, such as banks, act as the vital link between the central bank and the public. When the Monetary Policy Committee (MPC) changes policy rates (like the Repo Rate), intermediaries transmit these changes by adjusting their own lending and deposit rates. This process, known as monetary transmission, influences borrowing costs for businesses and consumers, thereby affecting spending, investment, and inflation in the real economy. Without these intermediaries, policy signals would not effectively reach the ground level.