I haven't changed much on the os since the installation, I haven't changed my terminal etc, so it is related to the apps that comes with the default arch installation.
Pressing shift+left/right arrow key used to select a character to left/right in terminal, weather it be the terminal that comes with the os or in vscodium.
But currently it just prints ABCD depending on the arrow key. How do I revert back to the old behavior?

I believe that it has been happening since i ran 'pacman -Syu' to update my system which I canceled multiple times in between mainly due to it taking a lot of time.
Currently, my system is up-to-date.

That's not a thing.

You don't - this has nothing to do w/ the TE (or only indirectly) but the process (in doubt the shell) you're running inside and you'll have to configure that.
An unconfigured bash would exhibit the symptoms you describe and from what I can tell also doesn't work out of the box.

I assume you installed some derivate and trashed its config by copying someone elses dotfiles?

You can typically configure this in your shell rc or for readline users inputrc, https://wiki.archlinux.org/title/Readline