Recent Developments in Indian Central Banking: Flying through Turbulence but Aided by Some Tailwinds

Abstract

This paper, an extension of our earlier work, presents a narrative of select broad aspects of Indian central banking during the pandemic and thereafter. As elsewhere, Indian monetary policy during the pandemic was characterized by substantial monetary expansion both in terms of rate cuts as well as asset purchase programs. The inflation targeting regime of Indian monetary policy was put to severe stress following the spurt in inflation after the pandemic. Besides, there have been two positive developments in Indian central banking. First, there has been significant improvement in the balance sheets of the Indian banking sector, following the institution of an effective corporate bankruptcy regime, write‐offs of earlier stressed assets, and recapitalization of public sector banks by the government. Second, India has made substantial progress in terms of adopting various facets of its digital financial infrastructure, where public initiatives were accompanied by private sector innovations. The digitalization of payments increased in both quantum and value and has touched the lives of the public through the ease of making daily payments, including the smallest of transactions.