70 Years of Independence
Special Feature – I-Day 2017
JOURNEY OF
INDIA’S CENTRAL BANK
V.SRINIVAS
The Reserve Bank of India was
established in 1935, as the country’s central bank. The sub-committee of the
First Round Table Conference said that efforts should be made to establish on
sure foundation and free from any political influence…a Reserve Bank which will
be entrusted with the management of the currency and exchange. Sir Osborne
Smith was appointed as the first Governor of the Reserve Bank of India. The
appointment was to ensure that the first Governor of the Reserve Bank would be
a person on whom the Bank of England could rely and from whom they could expect
unquestioning cooperation. Sir Osborne Smith resigned in 1936 citing
Government’s attempts to dominate the RBI. The main causes of Sir Osborne
Smith’s resignation were, apart from his temperamental incompatibility, the
serious differences of opinion which arose between him and the Finance Member
over the lowering of the Bank rate and the management of the Bank’s
investments.
On August 11, 1943 Sir
C.D.Deshmukh ICS was appointed as the first Indian Governor, of the Reserve
Bank of India at the young age of 47. He represented India at the Bretton
Woods Conference in 1944 for creation of the IMF and World Bank which India
joined as an Original member. The Reserve Bank of India was nationalized and
brought into public ownership. On July 1, 1949 Sir Benegal Rama Rau was
appointed as Governor RBI. In 1951, the RBI increased the interest rates to 3.5
percent from 3 percent at which it had remained since 1935. On 12th
December 1956, Prime Minister Jawaharlal Nehru addressed Governor RBI Sir
Benegal Rama Rau on a memorandum circulated by the Governor to the Directors of
RBI on the Finance Bill. The Prime Minister said “I have read this memorandum
with great surprise. Apart from the contents of this memorandum, the whole
approach appears to me to be improper. It is if I may use the words, an
agitational approach against the Central Government. …Monetary policies must
necessarily depend upon the larger policies which a Government pursues. It is
in the ambit of those larger policies that the Reserve Bank can advise. It
cannot challenge the main objective and policies of Government.” On January 7,
1957 Sir Benegal Rama Rau resigned from the post of Governor RBI.
In
July 1966, the Rupee was devalued by 36.5 percent to bring domestic prices in
line with external prices, to enhance the competitiveness of exports. The US
dollar which was equivalent to Rs. 4.75 rose to Rs. 7.50 and the pound sterling
from Rs. 13.33 to Rs. 21. The Government declared a plan holiday. In July 1969,
the Government approved the Nationalization of 14 major Indian Scheduled
Commercial Banks under the Banking Companies (Acquisition and Transfer of
Undertakings) Ordinance 1969. This was followed by a major push to enhance
Rural Credit came when the Regional Rural Banks Bill was passed in January
1976. The RRB’s were envisaged as state-sponsored, regional based, rural
oriented commercial banks.
The
Balance of Payments situation changed dramatically in 1979-80. Inflation soared
from 3 percent to 22 percent and the external terms of trade worsened
significantly. India sought a loan for SDR 5 billion from the IMF. The Fund
program envisaged a reduction of the current account deficit by 2 percent of GDP
and the ceiling on external commercial borrowing. Through the program period
(November 1981 to February 1983) the RBI followed a policy of gradual
devaluation of the rupee against a basket of currencies. India met all the
performance criteria agreed upon and made each drawing on time. After 3 years,
India had drawn SDR 3.9 billion of the SDR 5 billion, leaving SDR 1.1 billion
to be drawn. India was again on the verge of an economic crisis by 1990. On
August 27, 1991, the Finance Minister addressed the Managing Director IMF for
an 18-month stand-by arrangement in an amount equivalent to SDR 1656 million. A
memorandum of economic policies setting out the economic program of the Government
of India for the period 1991/92 and 1992/93 was also submitted. The Government
indicated its willingness to enter into a comprehensive structural adjustment
program, supported by an arrangement under the Extended Fund Facility.
In November 1997 the RBI was
confronted with the challenge of handling the Asian Currency Crisis. The RBI
introduced a series of measures aimed at absorbing excess liquidity without
affecting availability of credit in productive sectors. By 2001, the RBI became
a regulator of the money market. The automatic monetization of budget deficits
was phased out with Government borrowing from the market. The rupee was made
fully convertible on the current account. In the period 2000-2008, the RBI
successfully handled banking supervision. The RBI adopted a modern payments and
settlements system for oversight of the financial sector. Severe penal action
was taken against errant banks. The RBI insisted on merger of banks with weak
balance sheets with stronger banks to ensure that there were no private sector
banks which did not meet the RBI’s capital adequacy requirements. Since 1935,
the RBI has been at the forefront of public policy and economic thought. It
represents one of the strongest Institutions of the Indian democracy.
…….
*V.Srinivas
is an IAS officer of 1989 batch, currently posted as Chairman Rajasthan Tax
Board Ajmer. He has served as Private Secretary to Finance Minister, Advisor to
Executive Director (India) International Monetary Fund, Washington DC and as
Planning and Finance Secretary Government of Rajasthan.
(This article is part 1 of the 2 part series on the Journeys
of India’s Banking Sector.)
Views
expressed in the article are author’s personal.