Financial Sector Reforms and Monetary Policy: The Indian Experience

The Indian economy has grown fast since the early 1980s in an environment of macroeconomic and financial stability, punctuated by the balance-of-payments crisis of the early 1990s. The period, especially since 1991, has been marked by broad-based economic reform that has touched every segment of the economy. The main objective of the financial sector reforms India initiated in the early 1990s was to create an efficient, competitive and stable financial sector, which in turn could contribute in greater measure to accelerate growth. Concomitantly, the monetary policy framework experienced a phased shift from direct instruments of monetary management to an increasing reliance on indirect instruments. Against this backdrop, this paper serves a threefold purpose. First, it presents a synoptic account of the reforms in the financial sector and monetary policy followed, secondly, by an assessment of these reforms in terms of outcomes and the health of the financial system. Finally, it draws lessons for monetary authorities that emerge from India’s experience in tackling issues of topical relevance. The author concludes that India’s multi-pronged approach towards managing its capital account, along with a cautious approach to financial liberalization, has ensured financial stability, which contrasts with the experience of several emerging market economies.