Effect of financial inclusion and fintech on the effectiveness of Indian monetary policy: an empirical investigation

Abstract

Purpose

Fintech plays a prominent role in augmenting the financial inclusion of the population and increasing the money supply, which calls for the intervention of monetary policy. This article is an attempt to examine the relationship between the financial inclusion, fintech and monetary policy effectiveness of the Indian economy, within the framework of wealth creation and transmission mechanism through the cost of capital.

Design/methodology/approach

On the quarterly data retrieved from multiple sources, autoregressive distributed lagged regression is used to examine the relationship between different variables as explained in four set models; after which the Toda–Yamamoto causality test is employed to capture the direction of the relationship.

Findings

The study finds a positive relationship between financial inclusion, fintech and inflation taken as a proxy for Monetary Policy Effectiveness (MPE) in the short as well as in the long run. However, the relationship between fintech and inflation is negative once the cost of capital is included in the models. The causality test exhibits the uni-directional causality from fintech to MPE and MPE to financial inclusion. Bi-directional causality exists between wealth and MPE. Similarly, bank rate and interbank rate are bound by bi-directional causality.

Research limitations/implications

Being financially included facilitates ease and boosts public access to more financial services and credit, leading to increased demand and hence inflation. Hence government and regulators need to take mindful measures to enhance the fintech development and financial inclusion to make the monetary policy effective.

Originality/value

As per the author's best knowledge, this is the first study to examine the relationship between fintech, financial inclusion and monetary policy effectiveness in the context of the Indian economy.

Citation

Mittal, R., Kathuria, T., Saini, M., Dhingra, B. and Yadav, M. (2023), "Effect of financial inclusion and fintech on the effectiveness of Indian monetary policy: an empirical investigation", International Journal of Social Economics, Vol. 50 No. 12, pp. 1702-1718. https://doi.org/10.1108/IJSE-01-2023-0034