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India’s monetary policy: The dynamics and the new normal in times of coronavirus

A ‘new normal’ in terms of central banks’ targets may have to be designed taking into account the implications of stopgap measures used to address the current health crisis.

The dynamics of India’s monetary policy and reforms in the financial sector for the years between 1990 and 2013 are well chronicled and debated. Until 2013, Reserve Bank of India’s (RBI) monetary policy approach was more of a multiple indicators approach, wherein inflation was one of the key factors but not the only one.

rbi1 copyRBI's monetary policy approach was more of a multiple indicators approach. Inflation was one of the key factors but not the only one. (Photo: PTI)

Inflation targeting (IT), then, was not on the agenda of the economy’s monetary policymakers. Two set of arguments were extended by experts to not adopt IT framework: First, perhaps, it was not needed in that phase of India’s development, and the second strand of literature states, India was not prepared to adopt a targeted policy on two prime accounts: first, inflation targeting requires an efficient monetary transmission mechanism through the operation of efficient financial markets, and absence of interest rate distortions. In India, although the money market, government and corporate debt and

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