The Indian banking system has seen important productivity improvements over the last two decades with the PSBs, in particular, bridging the gap with new private banks and foreign banks. However, the pace of progress has declined, largely due to lack of desired impetus. We continue to lag behind several other countries on various productivity parameters. Our banks have to strive towards closing this gap.
However, focusing on domestic price stability will necessitate flexibility in the long run. This flexibility includes exchange rate flexibility. As indicated by Mundell’s famous quartet, if three of the four conditions are fulfilled - free trade, international capital mobility and an independent domestic monetary policy focusing on the maintenance of price stability - it is not possible to maintain fixed exchange rates.