Explain the channel through which financial intermediation can be influenced by Monetary Policy.

Explain the channel through which financial intermediation can be influenced by Monetary Policy. 

Ans. Banks are the channel through which financial intermediation can be influenced by the Monetary Policy. It is explained below:

When interest rates change due to monetary policy of the government, demand and supply of money gets affected. It brings about changes in equilibrium quantity of credit demanded and supplied in the market. An increase in interest rate demand for lonable funds reduces and therefore, credit supply comes down. On the other hand when there is decrease in interest rates, there is increase in demand for lonable funds and credit supply increases. Similarly, an increase in CRR and SLR reduces the capacity of the bank to lend and therefore credit supply decreases. On the other hand, if there is decrease in CRR/SLR, the bank can lend more and credit supply increases.