Monetary policy transmission refers to how changes in RBI's policy rate impact actual lending rates, investment decisions, and economic growth. Despite multiple rate cuts since 2019, transmission remains weak in India. Banks have reduced deposit rates faster than lending rates, creating asset-liability mismatches. Corporate bond markets remain underdeveloped, limiting alternative funding sources. RBI introduced external benchmarking in 2019, mandating banks link retail loans to repo rate for better transmission.

Monetary policy transmission in India faces structural bottlenecks that weaken RBI's ability to influence economic activity through interest rate changes. The transmission mechanism operates through multiple channels - interest rate channel (bank lending rates), credit channel (bank lending volumes), exchange rate channel, and asset price channel. However, India's bank-dominated financial system creates dependencies on banking sector health. High NPAs, risk aversion, and regulatory overhang make banks reluctant to pass on rate cuts fully. The predominance of small borrowers who lack access to capital markets further constrains transmission. RBI's shift to external benchmarking for retail loans and introduction of liquidity management tools like LTRO aim to improve transmission efficiency. The effectiveness varies across sectors - housing and auto loans show better transmission than working capital loans. Corporate funding through commercial papers and bonds remains limited to large firms, leaving MSMEs dependent on bank credit where transmission lags persist.