Comment on “Recent Developments in Indian Central Banking: Flying through Turbulence but Aided by Some Tailwinds”

Ray and Mohan (2025) is a well-written and accessible paper that specifically deals with three issues in the context of the mandate of the Reserve Bank of India (RBI).

First, it analyses the level and composition of inflation during the past 20 years, comparing them before and after India adopted the Inflation Targeting (IT) regime in 2016. It notices that while the level of inflation has come down since the adoption of IT, the decline may not be attributed solely to this new monetary policy framework. The decline in inflation levels has been likely as much due to external factors, outside the control of monetary policy, as to IT. This argument is bolstered by the observation that the level of inflation post IT is as high as seen from 1995–1996 to 2007–2008 (the present paper dismisses the period of high inflation from 2008–2009 to 2012–2013 as an aberration).

This discussion would have been richer if the present paper had also observed, as seen in Ray and Mohan's (2025) fig. 1, and as pointed out in Eichengreen et al. (2021), that the volatility of inflation has been lower, while the transmission of monetary policy has improved during the post IT period. Besides, on technical grounds, the arguments regarding the relative levels of inflation would have been stronger had Ray and Mohan accounted for shocks to inflation, both domestic or external, and still established them.

Be that as it may, Ray and Mohan could have made a significant contribution by taking a view on how the framework may evolve further as it completes 8 years of existence later this year. Among other things, does the current wide band of inflation, 2–6%, serve India well? How and at what frequency should it revise the inflation basket? How may the wide gap between the consumer price index and wholesale price index be understood better and bridged?

Second, Ray and Mohan acknowledge the recent strengthening of the banking sector. India has successfully resolved nearly a decade-long asset quality crisis, through a series of policy measures, such as mergers, recapitalization, Insolvency and Bankruptcy Code, asset quality review, and Prompt Corrective Action.

An issue of interest is how the sector is likely to evolve hereon. What role can the RBI play as a regulator while weighing the trade-offs between growth with stability? How may the ownership structure of the banks evolve to make the sector larger, more resilient, and more growth supportive? Among other things, would further consolidation of the sector unleash additional operational and allocational efficiency gains?

Weaker asset quality and poorer efficiency have been almost fully aligned with public sector banks in India for much of the past 30 years, barring the exceptions of a few years. Past improvements in the functioning of public sector banks, after each episode of restructuring and recapitalization, have not lasted beyond a few years. Even though the issues related to the banking sector may have been handled well for now, this may not remain the case.

On that, Ray and Mohan's (2025) fig. 4 could have made the distinction sharper by contrasting the asset quality directly between the public sector and private banks; and by making such comparisons for more indicators of performance.

Third, digitalization of the payments system has been a remarkable achievement for India. The present paper could have taken a view of what it may mean about the wider rollout of the Central Bank Digital Currency, the banking system, fintech, and financial inclusion. What challenges or opportunities might the RBI face and could leverage going forward?

Finally, an important set of issues that did not get space in Ray and Mohan is how well the RBI has navigated external challenges, especially those emanating from higher oil prices, inflation, US monetary policy, and the international risk aversion to emerging market securities. In particular, how it has managed its exchange rate.

Do Mohan and Ray agree with the way that the RBI has managed its exchange rate in recent years – shifting the focus to a more proactive use of reserves to navigate volatility rather than letting the exchange rate be the automatic stabilizer? Does it hold an adequate or an excessive level of reserves? Besides the level of reserves and select swap lines, should it consider any other safety nets?

What should be its stance on capital account liberalization in view of recurrent volatility that India faces along with the rest of the emerging world?

A further discussion along the lines suggested above would make Ray and Mohan (2025) an even richer paper on recent developments in central banking in India.