More often than not, the expected change rather than the actual change in real interest rate, following a change in the policy rate, often drives the actions of the economic agents. Thus, the ability to condition inflation expectations, rather than the decisions on the policy rates, is of fundamental importance to monetary policy making now.
In this context, credible communication and creative engagement with the market and economic agents has emerged as the critical channel of monetary transmission as against the traditional channels. The presence of administered interest rates, even in segments of a financial system, could hold back appropriate adjustments in real rates as a sequel to changes in the policy rates.