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NATIONAL LAW UNIVERSITY ODISHA
Project Topic: CHANGING ROLE OF RBI IN INDIAN ECONOMY
Submitted Submitted By: Ms. Ankita Sen(010)
To: Madhubrata
Rayasingh
Ankita Dhabu(009) Sayali Kadu(041)
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Index Introduction……………………………………………………….3-4 Evolution of RBI through ages: a traditional and modern look 1. First Phase: 1935-1951: The commencement of RBI…………5-8 2. Second Phase: 1951-1967: The years of Policy Formations…9-15 a) Monetary policy making b) Environment to form monetary policies c) Deficit Financing and Monetary control d) Rural Credit e) A developmental role 3. Third Phase: 1967-1981: Nationalization of Banks…………16-19 a) The defining event: Bank Nationalization b) Further detail of Social Control of Banks c) Venturing overseas Recent Phase of RBI……………………………………………19-24 a) 1991-2006: The reforms phase b) c) World class service in Banking d) Some major impacts of reforms e) Recent Monetary Policies (2007-08): A Review f) Current Role g) In the tenure of Raghuram Rajan as Governor
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Prediction of Future Role……………………………………....25-26 Conclusion…………………………………………………………..26
INTRODUCTION The Reserve Bank of India was established on April 1, 1935 by the Reserve Bank of India Act, 1934. Initially, the RBI was privately owned, but after nationalisation in 1949, it came to be fully owned by the Government of India. The fact that RBI was set up as per the recommendation of a commission that was finally called after a sufficient amount of preliminary study by various other commissions also speaks volumes about the role that this ‘central bank’ was intended to play. ‘The question of a central banking institution for India had been under examination both by Royal Commissions and by the Legislature long before the Hilton-Young Commission recommended in 1926 that India’s financial structure should be completed by the creation of a central bank.’ 1 The Reserve Bank of India was conceptualised on the outlook, working style and guidelines presented to the commission by the visionary Dr. Ambedkar. Historically the economic governance requirements focussed primarily on currency and exchange, than banking or rather, central banking. Back then, currency and banking were quite disconnected . ‘It was proposed at that time to amalgamate the three Presidency Banks into one strong institution. The central banking functions envisaged for the new institution were not only those of note issue and ‘banker to the Government’, as in earlier proposals, but also maintenance of the gold standard, promoting gold circulation as well as measuring and dealing with requirements of trade for foreign remittances. The new bank was to perform commercial banking functions as well, as the Presidency Banks
1 ML Tannan, Tannan’s Banking Law and Practice in India, Reserve Bank of India as Central Bank, p. 333. 3 | Page
had been doing till then.’2 In 1921, the three Presidency Banks got amalgamated into the Imperial Bank. ‘The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as: "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."’3 This description implies a vast spectrum of functions as well as powers that have been conferred upon the RBI. Initially, when the bank began its operations, it performed the functions transferred to it from the erstwhile Controller of Currency and the Imperial Bank of India—the management of Government s and public debt and the augmentation of banking facilities across the country. The RBI started as a mere banker to the Government, but its roles and functions have undergone a good deal of changes with changes in the economic scenario. The predominant factors that contribute to the consistent change in the role of RBI are globalisation, external economic conditions such as recession on the world economy, internal economic conditions, politics- national as well as international, etc. This paper deals with the changing role of RBI, which is at the helm of affairs in the Indian economy, since its inception to the current date.
2 History of the Reserve Bank of India, RBI website, http://rbidocs.rbi.org.in/rdocs/content/PDFs/89634.pdf 3 Reserve Bank of India website, http://www.rbi.org.in/scripts/AboutusDisplay.aspx#EP1 4 | Page
EVOLUTION OF RBI THROUGH AGES: A TRADITIONAL AND MODERN LOOK: RBI, the central bank of India from the time of its inception has brought about various changes in the economic framework of the country. In order to study the relevant contributions made by the Reserve Bank of India, we need to look at different periods of time. Essentially, in this paper, we will try to cover the contributions of the RBI over a span of period between mid 1930’s to 2000’s. In order to add clarity and preciseness to our study, we will divide this span of time into a few periods.
FIRST PHASE - 1935-1951: The Commencement of RBI Being established by the Reserve Bank of India Act 1934, starting operations from 1935, the Reserve Bank of India had a huge task at hand to weigh and balance the economic position of the country and setup a concrete economic framework. The period 1935-51 were the formative years of the Reserve Bank of India. Appointments of the Governor, Deputy Governor, and the Central Board were made and gradually the Reserve Bank of India was constituted. Finally in the year 5 | Page
1935, RBI, assumed the functions of the Controller of the currency and from the Imperial Bank of India of the task of managing Government s, also, public debt. The currency offices that existed at that time at various places like Calcutta, Madras, Bombay, Lahore, Karachi etc. became the Issue Department branches of the bank. The Central Board of the bank decided in its meeting dated 23 rd February 1935 that there would be a memorandum of procedure to facilitate the issue of shares of the Reserve Bank of India. Accordingly, preparations were made in order to receive applications for the same. This issue of shares created a widespread interest. However, RBI also faced criticism in the form of popular perceptions that the issue of shares was just a clever propaganda by the RBI and thus, the press urged the people so as to acquire as many number of shares as they could so that RBI could not develop as India’s financial autonomy. Gradually, as conflicts resolved, the RBI began its initial operations. “The early months of the bank were taken up by activities of a preliminary nature, such as the preparation and conclusion of agreements with the Central Government for the management of public debt and Government s and with the Imperial Bank of India for undertaking the work as the agent of the Reserve Bank. Besides, the Bank formulated detailed rules and regulations relating to matters covered under Section 58 of the Reserve Bank of India Act. These related mainly to General Regulations regarding the functioning of Central and Local Boards, Regulations regarding the relations of scheduled banks with the Reserve Bank and returns to be submitted by the former and Staff Regulations pertaining to service conditions of staff to be recruited by the Bank in future”4 . The first currency notes were issued by the bank in the month of January 1938. It contained denominations of Rs.5 and Rs.10. Gradually, the bank proceeded with issuing notes of Rs.100, Rs.1000 and Rs.10,000. The bank gradually started acting as a banker to the Government of India. It was responsible for regulating the receipt of moneys, payment of moneys, exchange and remittance, also managing public debt, issuing new notes. The Government was required to deposit all its cash balances in the bank in the form of ‘interest free deposits’ . The general functions of the Reserve Bank of India continued when the war started affecting its operations mainly in the phase 1939-1945. During these war years, the role of RBI as the banker to the Government became most prominent. It had the responsibility of advising the Government in the area of fiscal policy to ensure that there was maximization of 4 Volume I, RBI History, The beginnings 121, http://rbidocs.rbi.org.in/rdocs/content/PDFs/89637.pdf 6 | Page
resources, excluding the generation of terrible inflationary pressures and also ensuring equity among the different sections of the society. The war also affected the budgetary position of the Indian Government. The budget had to meet not only India’s requirements but also, the requirements of the allied forces. During the first two financial years of the war i.e. 1940-41 and 1941-42, the expenditure was moderate considering India’s own outlook. However, the next two years saw sharp rise in India’s aggregate expenditure. On the other hand, the Government of India received the reimbursable portion of the expenditure during the war- an asset that was in the form of sterling and was not in a position to be used immediately. The Indian Government endeavored to increase additional tax sources through levying new taxes and also enhancing the existing rates. Even then, the revenue collected from tax could not match India’s requirements. As a result, the Indian revenue saw substantial deficits during this period. In this scenario, gradually, a fiscal policy evolved. The question that arose was “whether the Government of India could not have raised even larger resources on their own , especially through additional taxation, so as to meet Recoverable War Expenditure to a greater extent”5. A budget strategy, functional only during the war was outlined. The Recoverable War Expenditure started seeing sharp rises from 1941. The central board of the RBI started becoming concerned with this huge increase in the circulation of currency and the accumulating sterling assets of the RBI itself. The Governor of RBI on the other hand was of the view that these sterling assets were not dangerous because they could be converted into producer goods as the need arose. After the war got over, further accumulation of sterling assets took place. There was already conflict existing between the opinions of the Board and the Governor. Finally, the Board did not agree to the Governments request and the following resolution was ed: “…the Board of the Reserve bank is alarmed at the continued accumulation of sterling even after the termination of the war and requests”6.
5 Volume I, RBI History, Chapter 10, http://rbidocs.rbi.org.in/rdocs/content/PDFs/89637.pdf 6 Volume I, RBI History, Chapter 19, http://rbidocs.rbi.org.in/rdocs/content/PDFs/89637.pdf 7 | Page
One of the important areas in economic policy making wherein prior preparation had been made by many countries before the World War II was that of exchange control. In India too, such a scheme was formulated and “was intended to be a part of a much larger and integrated plan of control devised for what came to be known as the ‘Sterling Area’, coordination being exercised by the British treasury and the Bank of England. “ 7. The main control was in the hands of the RBI acting as the agent of the Indian Government. The Government working through the bank issued several notifications under the Defense of India Rule and the Sea Custom’s Act 1878, time and again. It was only in 1947 that a separate Foreign Exchange Regulation Act was ed. The RBI, exercised its control by issuing instructions to the general public and also to the once who were authorized dealers in the area of foreign exchange in various forms such as public notices, circulars etc. However, the RBI was only an advisory body and the manner of its control was the decision of the Government. The Bank’s role in the first phase would remain incomplete if reference is not drawn to the responsibilities that the RBI carried as an employee. It had the task of providing proper remuneration and sufficient incentives in order to attract people of high stature, caliber and integrity. On the other hand, it had to take care of the fact that being a public institution it had to avoid any kind of extravagance to prevent shortage of funds. Gradually, jobs in the RBI were becoming more and more sought after, mainly triggered by the unemployment ratio of the educated youth in the country. As time ed, the bank improved its recruitment and promotion policies, a result of experience.
7 Volume I, RBI History, Chapter 12, http://rbidocs.rbi.org.in/rdocs/content/PDFs/89637.pdf 8 | Page
SECOND PHASE : 1951-1967 – Years of Policy Formations MONETARY POLICY MAKING Monitory policy defines the function of a central Bank. The Reserve Bank of India was in charge of quite a large number of developmental initiatives for the growth of independent India. RBI had to take the responsibility for “deepening the financial sector of the economy” 8and thus it had to keep monitory policy in a wider ambit as compared to most traditional central banks. It was only because RBI’s own initiatives and plan development of that the monitory policy changed substantially during this period. Monitory policy continuously focussed on the short term seasonal pressures and the proposed targets of the five year plans acted as a backdrop through which the former responsibility was to be discharged. However, in order to overcome these short term challenges, the Bank did not forget the bigger picture. “But the practical necessities of decision-making under multiple constraints often led to the adoption, sometimes against the better judgement of its officers if not always of the Bank, of measures which created bigger problems in the longer term than the more 8 Volume II,RBI History, Monetory and Credit Policy, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90017.pdf 9 | Page
immediate ones they helped to resolve. As the logic of decision-making became endogenized in the form of precedents and institutional evolution, the course was set for departures which however small or partial in the beginning, exercised over a period of time a tangible influence on the overall effectiveness of the Bank's monetary policy.”9
ENVIRONMENT TO FORMULATE MONITORY POLICIESDEFICIT FINANCINGThe monitory policies are also likely to be affected by a factor called deficit financing. “Deficit financing, defined narrowly as the change in the government's indebtedness to the Reserve Bank of India, has been an important part of plan financing in India, and a key element in determining the environment for monetary policy.”10 This has been found true to quite an extent in the first 3 five year plans. Starting with the first plan, the total outlay in the public sector was Rs 1960 crores. Out of this amount, Rs. 260 crores were lent by the Bank to the Government. In the existing backdrop of low inflation rates during the first plan, the government resorted to deficit financing, by changing its indebtedness to the RBI by a quarter of the total outlay in the public sector(Rs. 4672 crores) during the second five year plan, that is, Rs. 1170 crores. During the third five year plan, it seemed that the Government had learnt a partial lesson from the previous two year plans. The figures in the third plan were somewhat like this- A total outlay of 8577 crores and 13.2 % of it, that is, Rs. 1133 crores represented the deficit. Overall, after the first 3 sfive year plans, it has been found that, out of a total outlay of Rs. 6628 crores in the public sector, Rs 626 crores were ed for by the Bank. Initially, when this concept of deficit financing started developing, both the Indian policy makers and the Reserve Bank of India were ive of it. The RBI was of the view that, deficit financing helped the Government to accomplish goals that could not be ed by the existing 9 Volume II, RBI History, Monetory and Credit Policy, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90017.pdf
10 Volume II, RBI History, Deficit Financing and the Environment for monitory policy, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90018.pdf
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resources and would require some additional supply of money. However, quite ironically, from the start of the first five year plan itself, the Reserve bank of India had been quite modest and submissive in its overall role. There were several reasons behind such an attitude of the Reserve Bank of India. The developments in this attitude of the RBI emerged “clearly in the course of the visit to Bombay in February 1958 of Per Jacobson, the Managing Director of the IMF. The latter's discussions at the Bank revealed that while not altogether unsympathetic towards India's development problems and efforts, he was sceptical about the policy of deficit financing and doubtful that it would give the government any substantial command over additional real resources for investment.”11 Gradually, the Bank, in an attempt to judge the impact of deficit financing on Indian economy, took into consideration various factors that would also determine the scope of operation of the monitory policy chalked out mainly to bring about the stabilization of prices. These factors included- “the availability of wage goods, chiefly foodgrains, as a major influence upon the extent to which any given level of deficit financing or public investment affected domestic prices. Generally speaking, the Bank also expected the relatively small role played by bank money in overall money supply and the substantial leakages of currency from the banking system to mitigate the inflationary impact of the expansion of its credit to the government.”12
DEFICIT FINANCING and MONITORY CONTROL: The activities, including public investments impose certain mammoth responsibilities on the reserve Bank of India. The Bank assumed roles like, banker to the Indian Government and the manager of its loans, which in turn affected the operation of the monitory policies. In this scenario, initially, the Bank was calm and reserved and was keeping itself on an observant stance. However, gradually in the mid-1950s, the RBI started indulging itself more into the requirements(mainly financial) of the public sector. Thus, since then , the Bank became more and
11 Volume II, RBI History, Deficit Financing and the Environment for monitory policy, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90018.pdf
12 Volume II, Deficit Financing and the Environment for monitory policy
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more vocal about the reservations it carried regarding the financial policies of the Government and, subsequently, its advice started carrying importance to the Government.
RURAL CREDIT: The Reserve Bank of India has been the first bank to introduce rural credit in the sphere of banking. The founding act of RBI gave it the responsibility to enlarge the scope of rural credit. The RBI took up this responsibility in the 1940’s however the implementation of action in order to carry out this responsibility was made in 1950’s. The bank called for an informal conference to assess the role of rural credit on the basis of the report submitted by the Rural Banking Enquiry Committee. The report submitted by the All India Rural Credit Survey, produced in 1954, gave the most important rural credit initiatives that the bank was going to take in the coming years. The Reserve Bank of India Act of 1934, played a major role in the development of banks in the sphere of agriculture. Bank played a negligible role in the rural sector until independence after which it started taking initiative in the marketing of crops or other seasonal operations. From lending a meager amount of one lakh to the cooperative banks in 1945-46, it went on to Rs.5.37 Crores to the cooperative banks for rural credit. A series of amendments were made in bank’s founding act and some of them widened the ambit of ‘marketing of crops’, ‘seasonal agricultural operations’, ‘crops’ in order to finance the cottage and small scale industries and this also enabled cooperative banks to lend for medium termed periods. The All India Rural Credit Survey Committee is the foundation for making a policy for the development of Institutional credit structures. This committee showed how institutional credit was not reaching the rural sector and proposed that many other committees and recommendations should be integrated and reorganized in order to tackle this problem. Services area approach, priority sector lending, NABARD, lead bank scheme are some of the results of this report. In the recent times, the Agriculture Credit Review Committee, established in 1989, was set to see the rural credit system in detail. It showed the true Picture and analyzed the gap between the cost incurred by the rural credit institution and the income generated by these institutions and 12 | P a g e
suggested that it needed external assistance to fill this gap. It also recommended that commercial banks should be given greater autonomy. It asked for reduction of political interference in cooperatives. Then came the Narshimam Committee in 1991, which suggested the redefinition of the priority sector and also recommended that the interest rates should be deregulated.
A DEVELOPMENTAL ROLE: Reserve Bank of India’s developmental role can be classified into two categories- Firstly, it helped in building an initial institutional infrastructure and secondly, acted as a financial system for the small scale industries.
INSTITUTIONAL INFRASTRUCTURE:
The RBI and the Indian
Government disagreed on the scope of studying the financial requirements in the private sector. Taking into consideration the views of both, the then finance minister and the RBI, a committee was created with Mr. A.D.Shroff(from TATA Sons) as its Chairman. As per the report of the Shroff committee it had been recommended to the bank that it should resort to refinance term loans given to industry by various, commercial banks. Initially, the RBI was reluctant to advance medium term loans to the industry. Gradually, with time, the banks opinion and view started attaining a moderate stage. Proposal came up to form a refinance corporation (in the form of a public company) under Company’s Act. However, later, RBI decided that the corporation would be a private company and would work tly with The State Bank of India, Life Insurance Commission and 14 other scheduled banks, the selection of which was based on their deposits. It was decided that the corporation would have a share capital, valued at Rs.25 Crores. The system was that, if loans were advanced by any member bank to an industrial concern i.e. medium sized, and the amount of such loan (given for a period of 3-7 years) did not exceed Rs.50 Lacs, these loans would be eligible for getting refinance under the umbrella of the quota decided for each member bank. “These loans were to be made for the purpose of increasing production, primarily to industries included in 5- year plans. In order to ensure
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that medium-sized firms benefitted from the lending facility, a ceiling of Rs.2.5 Crores was stipulated for the pay-up capital and reserves of borrowing concerns”13. In the initial years the corporation’s performance was below the expectation. The scenario was deteriorating. In response to this, the corporation undertook liberalization of its refinance facilities in 1960. Refinance facilities were extended to the financial corporations of states and also to the state co-operative banks. In spite of this, a lump some proportion of refinance was accessed by the commercial banks. “Besides testifying to their success, the sharp increase in the 'outgo of funds' from the corporation after the liberalization and diversification measures of 1960-61 signified the accelerated tempo of private investment activity in industry and helped illustrate the latent demand within the country for an expanded industrial financing agency” 14. Thus, the Industrial Development Bank of India was formed in order to meet the above demand. With growing industrial activity, the recommendation of the Shroff committee was recalled. The committee recommended that investment trusts should be formed in both public as well as private sectors in order to spread and promote industrial activity and investment. This called for the creation of unit trusts that would regulate the mobilization of resources for promoting industrial development and democratization of the concept of share ownership, like what has been envisaged in the Indian constitution under the heading of Directive Principles of State Policy. However, there was an anticipated fear that there would be intense competition among the unit trusts which would in turn limit the amount of business and hence, viability of these unit trusts was also feared. Instead, a body called the unit trust of India was set up, that would now act as a “de facto public sector monopoly”15. Thus, the RBI had played a major role in building a proper industrial infrastructure.
13 Volume II, RBI History, Building and Institutional Infrastructure, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90034.pdf 14 Volume II, RBI History, Building and Institutional Infrastructure, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90034.pdf 15 Volume II, RBI History, Building and Institutional Infrastructure, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90034.pdf 14 | P a g e
TO THE SMALL SCALE INDUSTRIES: As a major part of India’s industrialization strategy, small scale industries (cottage industries) have always been considered important. In order to speed up the development of such industries, a network of agencies was formed during the implementation of the first five year plan. However, the scheduled banks, the state financial corporations etc. hesitated to closely finance these small scale industries, mainly because they were seen as credit risk areas. Thus, the small scale industries received only a minimal proportion of the entire credit. In this scenario, it is the Reserve Bank of India that played an imporatnat role in “establishing or ing institutions intended to enlarge the flow of credit to small industries and in encouraging existing institutions, notably the State Bank of India, to launch more liberal schemes to finance small industries in collaboration with statelevel institutions”16. However, when these steps did not yield any result, the RBI started engaging itseld by identifying the needs and requirements of these industries, since the late 1950’s. The bank itself came up with a scheme that would guarantee and advance institutional loans to the small scale and cottage industries and would refinance the lending of commercial banks o these industries at certain concessional rates. Among these small scale industries, it was the handloom industry, that was labour intensive was given careful treatment. Thus the RBI not only experienced the problems of providing financial to the small scale industries at the same time also, played its part in various attempts to resolve such problems.
16 Volume II, RBI History, Financing Small Industries and Exports, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90035.pdf 15 | P a g e
Third Phase: 19671981:Nationalization of Banks THE DEFINING EVENT: BANK NATIONALIZATION In the month of July 1969, such an economic event took place that even for the subsequent three decades, its effect still reverberates in the Indian economy-the Government of India brought about the nationalization of 14 private sector banks. In the period 1951-1966 efforts were constantly being made to strengthen commercial banking that was then very fragile. The spread of banking started increasing. However, one major problem was that the expansion of banking took place mainly in the urban areas, the semi-urban areas as well as the rural areas went unnoticed. Due to this, various economic activities in sectors like agriculture, small scale industries, self employed groups failed to have access to any proper banking facility. This 16 | P a g e
scenario led to a common political perception, according to which the private banks were unaware of their responsibilities towards the society and its requirements of credit. In this situation, under the influence of the report of Economic Programme Committee of AICC( All India Congress Committee) it was felt necessary to bring about the nationalization of banks as an integral step in order to establish a just social order. The situation in the country was such that India had been disastrously defeated by the Chinese, Indian treasury was empty, public morale was low, prices were rising and a general rule of dissatisfaction against the Government was brewing up. In the midst of constant battle for succession, among the congress leadership, Lal Bahadur Shastri was appointed as the Prime minister. Ms. Indira Gandhi succeeded him. In order to secure the vote and hence the of the poor people, she brought about the nationalization of banks. The main objective of this event was said to be “to serve the cause of economic growth more effectively and to make credit available to the producers in all fields where it is needed”17.
FURTHER DETAILS OF THE SOCIAL CONTROL OF BANKS: In the 1960’s there were constant debates about certain issues- social control of the banks and its adequacy, need for an outright nationalization. Finally, in 1969, the issues were resolved as the Prime Minister Ms. Indira Gandhi gave her decision in the favor of Bank Nationalization. This called for a new age in Indian banking. However, in order to expand the process of credit delivery, two things were essential- first, expansion of the branches and second, increase in number of lonable funds. To the second requirement, the Reserve bank of India, turned back to the bill market scheme of 1952. The purpose was to provide the banks with a particular mechanism that would help them obtain certain advances from the bank. The RBI hoped that undertakings in the public sector would provide the market with a substantial resource of bills and would thus provide an impetus towards making the system of bills popular as a financial instrument. The enter][p;kjprises in the public sector were of the view that they were not 17 Volume III,RBI History, The defining Element Pg 1, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90069.pdf 17 | P a g e
convinced whatever the bank was asking them because it differed with their operational structure and different perceptions about the utility of a new revised billing scheme. In 1967, the RBI, in collaboration with the polity of the country came up with the idea of ‘social control’ of banks. Indira Gandhi promoted the idea of bank nationalisation as part of her election manifesto in 1967. When the Banking Commission was created, it took in-depth consultation from the Governor and Deputy Governor of RBI before submitting the final report. B N Adarkar, the then Deputy Governor also sent a detailed commentary on the report. The Government also extensively consulted the RBI regarding the issue of social control. The making of the final social control scheme saw the predominant role played by the RBI for the same. The Finance Ministry prepared legislation along with the RBI, for the setting up of a National Credit Council. This shows the deep and pervasive control of the RBI in the parliamentary law making relating to economic policies and also in the governmental decision-making process.
VENTURING OVERSEAS: ‘The Reserve Bank of India is empowered by the Banking Regulation Act to issue licences to commercial banks incorporated in India to open a branch or office either in India or Even foreign banks require a licence from the RBI to open its branches in India. abroad.’ 18Till the 1970s, three factors influenced the RBI’s policy regarding the indigenous banks venturing into foreign markets: foreign exchange requirements for the setting up of a bank office abroad; the consideration of business potential that depended on the number of ethnic Indians residing in the country in question; and importantly, the issue of reciprocity. The Reserve Bank had taken cautious moves while permitting Indian banks to open offices overseas, because it was unfavourable that foreign banks reciprocated by opening their own branches in India. This would have two severe effects: firstly, that the businesses of Indian banks in India would be hit, and secondly, the bank would have to allow remittance of profits to overseas banks for functioning in India. The reciprocity factor had a direct connection with India’s international economic relations in general, and its bilateral relationship with the country concerned. This brings to the fore an important role of the RBI, that of a of India’s foreign relations. A lot would depend on 18 Venturing Overseas, RBI History, Volume III, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90072.pdf 18 | P a g e
each of the RBI’s discretion to grant or not a licence to an Indian bank to expand its functions abroad or to a foreign bank to set foot in India. Post the 1970s, the Reserve Bank has been increasingly liberal in granting licences, as a result of improvement in the economic condition and increased competency of Indian Banks, all of which has again happened due to the efforts of the central bank.With the onset of the social control era, the Bank’s positive contribution to the farmers of the country also escalated. ‘The possibility of commercial banks providing agricultural credit in increasing measure became evident’ 19. ‘Thus, from the mid-1960s the role of the RBI became more varied, inasmuch as it began to emphasise a multi-agency approach to rural credit, and integration of term lending and working capital finance.’20
BANK AND THE FARMERS:+ The Reserve Bank of India, since the first phase just after its formation has been giving a careful focus to the issue of agricultural credit to the farmers. This was being done mainly by the mechanism of cooperative credit facilities. However, as time ed, mainly in the period of the middle part of the 1960s, the Reserve Bank of India’ s approach towards agricultural credit started changing, in that, it started adopting a more multi agency approach. “Institutional finance for agriculture grew sharply during the late 1960s and 1970s. The main institutions to provide credit were the state cooperative banks, primary agricultural credit societies, land development banks and scheduled commercial banks including RRBs”21
RECENT PHASE OF RBI 1991-2006: THE REFORMS PHASE 19 The Bank and Farmers, RBI History, Volume III, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90074.pdf 20 Id. 21 Volume III, RBI History, Bank and the Farmers, Page 266, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90074.pdf 19 | P a g e
RBi has undergone radical changes in its role and functions for the last ten to fifteen years since the 1990’s. Macroeconomic policies were being overhauled from a setup of a mixed economy to the setup of a competitive and open market. Moreover, before 1991, RBI’s role was more of ‘nation-centric’. However, gradually it was becoming ‘world-centric’. This was mainly to bring the Indian economy at par with the norms set by the IMF (International Monetary Fund) WTO (World Trade Organization), IBRD(International Bank of Reconstruction and Development) so that India could compete with the global economic challenges. In the year 1991, the M.Narshimham committee through its report talked about reforms in both financial and banking sectors by way of removing any kind of restriction on the expansion and entry of private and foreign banks. As per the report, Indian and foreign banks could enter into t ventures. Now, increased priority was being given to factors like profitability of the bank, efficiency of customer service etc. The Statutory Liquidity Ratio(SLR) and Cash Reserve Ratio(CRR) got reduced, also adequacy of capital and a greater credit portfolio was made available for the banks. Th other changes include encouraging mutual fund companies and financial companies to invest in the stock market of India, which brought about an unexpected hike in the stock market. Significant inflow of capital from FDI’s and FII’s started. This in turn made it necessary to convert Indian currency to dollars. Indian firms were being allowed to raise funds or invest abroad. It was at this period after independence, that Indian banking as well as financial systems were being globalized.
WORLD CLASS SERVICES IN BANKING: In the recent phase RBI’s main aim has been integrating the world class services in finance sector coupled with maximum profits and operational efficiency. The RBI’s contributions in the recent phase include: a) A projectile growth of 7-8% in the annual income b) Stability in the prices by controlling inflation rate between 3%-5% c) Monetary stability by facilitating and encouraging in flow of not only foreign capital but also foreign exchange reserves. d) Maintaining stability in the exchange range e) Adherence to deficit financing norms which were seen as % of GDP f) Introduction of knowledge based technologies that would promote profits, efficiency in operations, pricing, cash management services.
SOME MAJOR IMPACTS OF THE REFORMS: a) FOREX Management: 20 | P a g e
“Reverse accumulations, which are long drawn out and considerable in size, have the propensity to generate a number of risks, in-cluding near termed inflation. Other risks may be in the form of monetary imbalances, high intervention costs, over heated credit and asset markets, liquid and distorted banking systems” 22. India, being an enmerging economy has been an accumulation of foreign exchange reserves since a couple of years. In the recent phase, the RBI has chalked out policies that are likely to counter and neutralize the adverse impact of reverse accumulation. b) Monetary Reforms: The RBI in recent years has become more capable to respond to emergency situations and shocks. This is mainly due to the novel financial and monetary reforms. Moreover, the new monetary policies have also proved to be effective in aiding the RBi proceed from the instruments of monetary control that are direct to the indirect instruments. Also, the RBI now relies less on CRR or Cash Reserve Ratio and other reserve requirements as monetary control instruments, As a result, CRR has fallen from 15% (1994-1995) to 5%(2000’s).
c) Capital Flow Management: Due to proper FOREX management, the net assets of foreign exchange were increasing too. In order to reduce such expansionary effect of increasing NFA’s (Net Foreign Exchange Assets), the RBI has started conducting sales of certain governing securities belonging to its own portfolio, in open market . In order to smoothen this process, the RBI has brought about the operation of the market stabilization schemes (MSS), which now acts as an instrument required for management of liquidity. This instrument is like an arrangement between the bank and the Indian Government to prevent excess of liquidity that might be created due to accumulation of NFA’s of the RBI. c) Reforms in Monetary Sector: “Non-food credit growth of scheduled commercial banks has remained nearly in the same range of
Rs.3,76,000 Crores (as compared to Rs.3,70,899 Crores of the previous
22 RBI and financial reforms edited by: K M Parchure ,ACFAI University Press ,Pg18 21 | P a g e
year). The years 2006 and 2007 witnessed a rise in bank credits to the agricultural sector”23. An approximate growth of 33% was seen in bank credits during the years 200607. Growth was also seen in the services sector at around 31%. This rapid growth was sured by an almost 27% growth in personal loans. Bank deposits have also been continuously rising at rates higher than that of rise in advances and loans. d) External Sector:
In the year 2006-07 export growth was seen at 22.5% as against the 23.4% of the last year. Continuous deficit has been seen in balances of the visible trade s but it has been rigorously compensated by steady increase in annual income from the ‘invisible receipts’-management consultancies, software services, other financial services. Under the foreign direct investment, foreign institutional investment, NRI deposits etc. huge inflows of capital have been received. In fact, the foreign exchange reserves level stood at nearly 200 billion by the end of March 2007.
RECENT MONETARY POLICIES (2007-2008)- A REVIEW: a) The GDP growth for the period January to March 2007 stood at 9.1% as against 10% of the last year. Real GDP in sectors like agriculture, service sector and industries also increased in 2006-07 as compared to 2005-06. b) Within the last four year period beginning from 2003-04, RBI has helped in achieving a trajectory growth of income from 5% to a bracket of around 9% per annum. Thus, RBI has been a major driving force of change resulting in macro economic growth, the impact of which is clearly visible in greater in flows of FII’s and FDI’s. Also, changes have been seen in the Indian stock market within the four year period shown by an increase in sensex from 12,000 points to 15,000 points. c) During the last four year period besides the service sector, the manufacturing sector has
also contributed 10% per annum to the area of national income. Improvements have also
23 RBI and financial reforms edited by: K M Parchure ,ACFAI University Press, Pg 20 22 | P a g e
been seen in the profit margins of the industries. Overall, there has been high confidence and optimism in business. Thus, in the recent phase, the Reserve Bank of India has been emerging as a major facilitator of not only monetary and banking policies but also, in the implementation of macroeconomic policies. Roles and functions of the RBI have also undergone radical changes because of the new commitment that RBI has now-international sensitivity of Indian economy.
CURRENT ROLE: One of the most pivotal functions of the central bank of any country is framing of the monetary policy, both short term as well as long term, for the economic governance of the country. ‘Monetary policy is the macroeconomic policy laid down by the central bank to control money supply in the economy. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.’ 24 In the Indian context, the monetary policy framed by the RBI aims at managing the money market in quantitative in order that it meets the demands of the various sectors of the economy, and increasing the growth rate of the national economy. Another crucial tool used by the central bank is the fiscal policy. A fiscal policy, unlike monetary policy, concerns itself with government spending and revenue collection in order to influence and regulate the macroeconomic productivity levels.
IN THE TENURE GOVERNOR:
OF
RAGHURAM
RAJAN
AS
After assuming office of the 23rd Governor of RBI, Dr. Raghuram Rajan issued a statement wherein he acknowledged the current precarious condition of the Indian economy caused 24 Economic Times, Definition of Monetary Policy, http://economictimes.indiatimes.com/definition/monetary-policy 23 | P a g e
primarily by global financial markets, and went on to articulate his plans and intentions to propel the Indian economy on a favourable path. He emphasised on the main function of RBI as stipulated by the Preamble of the RBI Act, 1934, of creating and maintaining monetary stability in the economy, by particularly dealing with the value of the Indian Rupee and the incessant problem of inflation. He has ordered committees to be formed to come up with recommendations for formulating the monetary policy framework. This suggests to us that the mandate of the RBI, by virtue of which it constitutes committees, which involve not only officers of the central bank, but also external experts, both national and international, has become very wide in the recent years. Also considerable is the fact that the recommendations of these committees are only advisory in nature, the final call being reserved with the Reserve Bank, implying that the central bank has gained a highly concentrated autonomy regarding economic policy decisions. Secondly, Mr. Rajan focussed on that role of the RBI, which is becoming increasingly significant in the wake of an open, liberalised economy and volatility in the global economy—the RBI’s developmental role. Technically being an instrumentality of the state, the RBI has a duty of socialist action as its important and indispensable role. With this in mind, Rajan iterated that he would focus on poverty alleviation and growth harmoniously, by increasing access to finance for the poor, rural small and medium scale industries. This will serve a dual purpose, the other being growth increment through smaller industries at a time of stymied growth rate of larger industries. The RBI can also be seen to be going in for decentralisation of its mandate. (domestic banks will no more have to approach the RBI for opening new branches). This situation allows us to analogise this power of RBI with the power of delegated legislation, available to the government and other public authorities by provision of the Constitution.
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PREDICTION OF FUTURE ROLE ‘We will not stop with these licenses. The RBI has put an excellent document on its website exploring the possibility of differentiated licenses for small banks and wholesale banks, the possibility of continuous or "on-tap" licensing, and the possibility of converting large urban cooperative banks into commercial banks. We will pursue these creative ideas of the RBI staff and come up with a detailed road map of the necessary reforms and regulations for freeing entry and making the licensing process more frequent after we get comments from stakeholders.’25 25 id 25 | P a g e
The coming into being of the proposed Indian Financial Code, the RBI’s role may be curtailed to make it more specific in nature. The Indian Financial Code Bill seeks to limit the role of the RBI to monetary management. If this should happen, the RBI’s responsibilities will only get concentrated to monopolise its power on the monetary facet of the economy.
The Reserve Bank is undertaking diversified responsibilities, one of them being research. It encourages research not just from its professional staff but also people from the teaching and student fraternities. This concept of knowledge sharing is bound to grow in the future with increase in complexity of the economy and specialisation.
With currency related crimes increasing, RBI has to upgrade its responsibility as a watchdog and bring in measures to curb the menace. It may have to set up required institutions or machinery for the same. Crime prevention will be an important role for the RBI in the coming time.
India is a welfare state and RBI is an agent of this state. It has been carrying out large functions that are socialistic and people oriented, in a successful manner. A lot still needs to be done in the developing economy of India. For this, the RBI must gear itself up for increased future challenges on the social front, with a clear and definitive strategy in the apprehension of growing political intervention. In the wake og the severe cyclone Phailin in the state of Odisha in October 2013, the Odisha State Government knocked the RBI’s doors for immediate intervention in facilitating government payments towards relief expenditure. This exemplifies that the RBI is also steadily attaining the role of a shock absorber in the Indian economy. It has to keep its policies and financial conditions in such a manner that it will be able to proactively perform a disaster management role in the years to come.
CONCLUSION: 26 | P a g e
Thus, after the survey of the roles of the Reserve Bank of India in different phases, it is clear that, the Bank’s function has changed with years. Such changes have made the Bank only more adaptive to the changing financial and social scenario in the emerging economy of India. Considering its current role, The Reserve Bank of India plays a major part in determining the future of Indian economy and its position in the global scenario.
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Project Topic: CHANGING ROLE OF RBI IN INDIAN ECONOMY
Submitted Submitted By: Ms. Ankita Sen(010)
To: Madhubrata
Rayasingh
Ankita Dhabu(009) Sayali Kadu(041)
1 | Page
Index Introduction……………………………………………………….3-4 Evolution of RBI through ages: a traditional and modern look 1. First Phase: 1935-1951: The commencement of RBI…………5-8 2. Second Phase: 1951-1967: The years of Policy Formations…9-15 a) Monetary policy making b) Environment to form monetary policies c) Deficit Financing and Monetary control d) Rural Credit e) A developmental role 3. Third Phase: 1967-1981: Nationalization of Banks…………16-19 a) The defining event: Bank Nationalization b) Further detail of Social Control of Banks c) Venturing overseas Recent Phase of RBI……………………………………………19-24 a) 1991-2006: The reforms phase b) c) World class service in Banking d) Some major impacts of reforms e) Recent Monetary Policies (2007-08): A Review f) Current Role g) In the tenure of Raghuram Rajan as Governor
2 | Page
Prediction of Future Role……………………………………....25-26 Conclusion…………………………………………………………..26
INTRODUCTION The Reserve Bank of India was established on April 1, 1935 by the Reserve Bank of India Act, 1934. Initially, the RBI was privately owned, but after nationalisation in 1949, it came to be fully owned by the Government of India. The fact that RBI was set up as per the recommendation of a commission that was finally called after a sufficient amount of preliminary study by various other commissions also speaks volumes about the role that this ‘central bank’ was intended to play. ‘The question of a central banking institution for India had been under examination both by Royal Commissions and by the Legislature long before the Hilton-Young Commission recommended in 1926 that India’s financial structure should be completed by the creation of a central bank.’ 1 The Reserve Bank of India was conceptualised on the outlook, working style and guidelines presented to the commission by the visionary Dr. Ambedkar. Historically the economic governance requirements focussed primarily on currency and exchange, than banking or rather, central banking. Back then, currency and banking were quite disconnected . ‘It was proposed at that time to amalgamate the three Presidency Banks into one strong institution. The central banking functions envisaged for the new institution were not only those of note issue and ‘banker to the Government’, as in earlier proposals, but also maintenance of the gold standard, promoting gold circulation as well as measuring and dealing with requirements of trade for foreign remittances. The new bank was to perform commercial banking functions as well, as the Presidency Banks
1 ML Tannan, Tannan’s Banking Law and Practice in India, Reserve Bank of India as Central Bank, p. 333. 3 | Page
had been doing till then.’2 In 1921, the three Presidency Banks got amalgamated into the Imperial Bank. ‘The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as: "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."’3 This description implies a vast spectrum of functions as well as powers that have been conferred upon the RBI. Initially, when the bank began its operations, it performed the functions transferred to it from the erstwhile Controller of Currency and the Imperial Bank of India—the management of Government s and public debt and the augmentation of banking facilities across the country. The RBI started as a mere banker to the Government, but its roles and functions have undergone a good deal of changes with changes in the economic scenario. The predominant factors that contribute to the consistent change in the role of RBI are globalisation, external economic conditions such as recession on the world economy, internal economic conditions, politics- national as well as international, etc. This paper deals with the changing role of RBI, which is at the helm of affairs in the Indian economy, since its inception to the current date.
2 History of the Reserve Bank of India, RBI website, http://rbidocs.rbi.org.in/rdocs/content/PDFs/89634.pdf 3 Reserve Bank of India website, http://www.rbi.org.in/scripts/AboutusDisplay.aspx#EP1 4 | Page
EVOLUTION OF RBI THROUGH AGES: A TRADITIONAL AND MODERN LOOK: RBI, the central bank of India from the time of its inception has brought about various changes in the economic framework of the country. In order to study the relevant contributions made by the Reserve Bank of India, we need to look at different periods of time. Essentially, in this paper, we will try to cover the contributions of the RBI over a span of period between mid 1930’s to 2000’s. In order to add clarity and preciseness to our study, we will divide this span of time into a few periods.
FIRST PHASE - 1935-1951: The Commencement of RBI Being established by the Reserve Bank of India Act 1934, starting operations from 1935, the Reserve Bank of India had a huge task at hand to weigh and balance the economic position of the country and setup a concrete economic framework. The period 1935-51 were the formative years of the Reserve Bank of India. Appointments of the Governor, Deputy Governor, and the Central Board were made and gradually the Reserve Bank of India was constituted. Finally in the year 5 | Page
1935, RBI, assumed the functions of the Controller of the currency and from the Imperial Bank of India of the task of managing Government s, also, public debt. The currency offices that existed at that time at various places like Calcutta, Madras, Bombay, Lahore, Karachi etc. became the Issue Department branches of the bank. The Central Board of the bank decided in its meeting dated 23 rd February 1935 that there would be a memorandum of procedure to facilitate the issue of shares of the Reserve Bank of India. Accordingly, preparations were made in order to receive applications for the same. This issue of shares created a widespread interest. However, RBI also faced criticism in the form of popular perceptions that the issue of shares was just a clever propaganda by the RBI and thus, the press urged the people so as to acquire as many number of shares as they could so that RBI could not develop as India’s financial autonomy. Gradually, as conflicts resolved, the RBI began its initial operations. “The early months of the bank were taken up by activities of a preliminary nature, such as the preparation and conclusion of agreements with the Central Government for the management of public debt and Government s and with the Imperial Bank of India for undertaking the work as the agent of the Reserve Bank. Besides, the Bank formulated detailed rules and regulations relating to matters covered under Section 58 of the Reserve Bank of India Act. These related mainly to General Regulations regarding the functioning of Central and Local Boards, Regulations regarding the relations of scheduled banks with the Reserve Bank and returns to be submitted by the former and Staff Regulations pertaining to service conditions of staff to be recruited by the Bank in future”4 . The first currency notes were issued by the bank in the month of January 1938. It contained denominations of Rs.5 and Rs.10. Gradually, the bank proceeded with issuing notes of Rs.100, Rs.1000 and Rs.10,000. The bank gradually started acting as a banker to the Government of India. It was responsible for regulating the receipt of moneys, payment of moneys, exchange and remittance, also managing public debt, issuing new notes. The Government was required to deposit all its cash balances in the bank in the form of ‘interest free deposits’ . The general functions of the Reserve Bank of India continued when the war started affecting its operations mainly in the phase 1939-1945. During these war years, the role of RBI as the banker to the Government became most prominent. It had the responsibility of advising the Government in the area of fiscal policy to ensure that there was maximization of 4 Volume I, RBI History, The beginnings 121, http://rbidocs.rbi.org.in/rdocs/content/PDFs/89637.pdf 6 | Page
resources, excluding the generation of terrible inflationary pressures and also ensuring equity among the different sections of the society. The war also affected the budgetary position of the Indian Government. The budget had to meet not only India’s requirements but also, the requirements of the allied forces. During the first two financial years of the war i.e. 1940-41 and 1941-42, the expenditure was moderate considering India’s own outlook. However, the next two years saw sharp rise in India’s aggregate expenditure. On the other hand, the Government of India received the reimbursable portion of the expenditure during the war- an asset that was in the form of sterling and was not in a position to be used immediately. The Indian Government endeavored to increase additional tax sources through levying new taxes and also enhancing the existing rates. Even then, the revenue collected from tax could not match India’s requirements. As a result, the Indian revenue saw substantial deficits during this period. In this scenario, gradually, a fiscal policy evolved. The question that arose was “whether the Government of India could not have raised even larger resources on their own , especially through additional taxation, so as to meet Recoverable War Expenditure to a greater extent”5. A budget strategy, functional only during the war was outlined. The Recoverable War Expenditure started seeing sharp rises from 1941. The central board of the RBI started becoming concerned with this huge increase in the circulation of currency and the accumulating sterling assets of the RBI itself. The Governor of RBI on the other hand was of the view that these sterling assets were not dangerous because they could be converted into producer goods as the need arose. After the war got over, further accumulation of sterling assets took place. There was already conflict existing between the opinions of the Board and the Governor. Finally, the Board did not agree to the Governments request and the following resolution was ed: “…the Board of the Reserve bank is alarmed at the continued accumulation of sterling even after the termination of the war and requests”6.
5 Volume I, RBI History, Chapter 10, http://rbidocs.rbi.org.in/rdocs/content/PDFs/89637.pdf 6 Volume I, RBI History, Chapter 19, http://rbidocs.rbi.org.in/rdocs/content/PDFs/89637.pdf 7 | Page
One of the important areas in economic policy making wherein prior preparation had been made by many countries before the World War II was that of exchange control. In India too, such a scheme was formulated and “was intended to be a part of a much larger and integrated plan of control devised for what came to be known as the ‘Sterling Area’, coordination being exercised by the British treasury and the Bank of England. “ 7. The main control was in the hands of the RBI acting as the agent of the Indian Government. The Government working through the bank issued several notifications under the Defense of India Rule and the Sea Custom’s Act 1878, time and again. It was only in 1947 that a separate Foreign Exchange Regulation Act was ed. The RBI, exercised its control by issuing instructions to the general public and also to the once who were authorized dealers in the area of foreign exchange in various forms such as public notices, circulars etc. However, the RBI was only an advisory body and the manner of its control was the decision of the Government. The Bank’s role in the first phase would remain incomplete if reference is not drawn to the responsibilities that the RBI carried as an employee. It had the task of providing proper remuneration and sufficient incentives in order to attract people of high stature, caliber and integrity. On the other hand, it had to take care of the fact that being a public institution it had to avoid any kind of extravagance to prevent shortage of funds. Gradually, jobs in the RBI were becoming more and more sought after, mainly triggered by the unemployment ratio of the educated youth in the country. As time ed, the bank improved its recruitment and promotion policies, a result of experience.
7 Volume I, RBI History, Chapter 12, http://rbidocs.rbi.org.in/rdocs/content/PDFs/89637.pdf 8 | Page
SECOND PHASE : 1951-1967 – Years of Policy Formations MONETARY POLICY MAKING Monitory policy defines the function of a central Bank. The Reserve Bank of India was in charge of quite a large number of developmental initiatives for the growth of independent India. RBI had to take the responsibility for “deepening the financial sector of the economy” 8and thus it had to keep monitory policy in a wider ambit as compared to most traditional central banks. It was only because RBI’s own initiatives and plan development of that the monitory policy changed substantially during this period. Monitory policy continuously focussed on the short term seasonal pressures and the proposed targets of the five year plans acted as a backdrop through which the former responsibility was to be discharged. However, in order to overcome these short term challenges, the Bank did not forget the bigger picture. “But the practical necessities of decision-making under multiple constraints often led to the adoption, sometimes against the better judgement of its officers if not always of the Bank, of measures which created bigger problems in the longer term than the more 8 Volume II,RBI History, Monetory and Credit Policy, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90017.pdf 9 | Page
immediate ones they helped to resolve. As the logic of decision-making became endogenized in the form of precedents and institutional evolution, the course was set for departures which however small or partial in the beginning, exercised over a period of time a tangible influence on the overall effectiveness of the Bank's monetary policy.”9
ENVIRONMENT TO FORMULATE MONITORY POLICIESDEFICIT FINANCINGThe monitory policies are also likely to be affected by a factor called deficit financing. “Deficit financing, defined narrowly as the change in the government's indebtedness to the Reserve Bank of India, has been an important part of plan financing in India, and a key element in determining the environment for monetary policy.”10 This has been found true to quite an extent in the first 3 five year plans. Starting with the first plan, the total outlay in the public sector was Rs 1960 crores. Out of this amount, Rs. 260 crores were lent by the Bank to the Government. In the existing backdrop of low inflation rates during the first plan, the government resorted to deficit financing, by changing its indebtedness to the RBI by a quarter of the total outlay in the public sector(Rs. 4672 crores) during the second five year plan, that is, Rs. 1170 crores. During the third five year plan, it seemed that the Government had learnt a partial lesson from the previous two year plans. The figures in the third plan were somewhat like this- A total outlay of 8577 crores and 13.2 % of it, that is, Rs. 1133 crores represented the deficit. Overall, after the first 3 sfive year plans, it has been found that, out of a total outlay of Rs. 6628 crores in the public sector, Rs 626 crores were ed for by the Bank. Initially, when this concept of deficit financing started developing, both the Indian policy makers and the Reserve Bank of India were ive of it. The RBI was of the view that, deficit financing helped the Government to accomplish goals that could not be ed by the existing 9 Volume II, RBI History, Monetory and Credit Policy, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90017.pdf
10 Volume II, RBI History, Deficit Financing and the Environment for monitory policy, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90018.pdf
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resources and would require some additional supply of money. However, quite ironically, from the start of the first five year plan itself, the Reserve bank of India had been quite modest and submissive in its overall role. There were several reasons behind such an attitude of the Reserve Bank of India. The developments in this attitude of the RBI emerged “clearly in the course of the visit to Bombay in February 1958 of Per Jacobson, the Managing Director of the IMF. The latter's discussions at the Bank revealed that while not altogether unsympathetic towards India's development problems and efforts, he was sceptical about the policy of deficit financing and doubtful that it would give the government any substantial command over additional real resources for investment.”11 Gradually, the Bank, in an attempt to judge the impact of deficit financing on Indian economy, took into consideration various factors that would also determine the scope of operation of the monitory policy chalked out mainly to bring about the stabilization of prices. These factors included- “the availability of wage goods, chiefly foodgrains, as a major influence upon the extent to which any given level of deficit financing or public investment affected domestic prices. Generally speaking, the Bank also expected the relatively small role played by bank money in overall money supply and the substantial leakages of currency from the banking system to mitigate the inflationary impact of the expansion of its credit to the government.”12
DEFICIT FINANCING and MONITORY CONTROL: The activities, including public investments impose certain mammoth responsibilities on the reserve Bank of India. The Bank assumed roles like, banker to the Indian Government and the manager of its loans, which in turn affected the operation of the monitory policies. In this scenario, initially, the Bank was calm and reserved and was keeping itself on an observant stance. However, gradually in the mid-1950s, the RBI started indulging itself more into the requirements(mainly financial) of the public sector. Thus, since then , the Bank became more and
11 Volume II, RBI History, Deficit Financing and the Environment for monitory policy, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90018.pdf
12 Volume II, Deficit Financing and the Environment for monitory policy
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more vocal about the reservations it carried regarding the financial policies of the Government and, subsequently, its advice started carrying importance to the Government.
RURAL CREDIT: The Reserve Bank of India has been the first bank to introduce rural credit in the sphere of banking. The founding act of RBI gave it the responsibility to enlarge the scope of rural credit. The RBI took up this responsibility in the 1940’s however the implementation of action in order to carry out this responsibility was made in 1950’s. The bank called for an informal conference to assess the role of rural credit on the basis of the report submitted by the Rural Banking Enquiry Committee. The report submitted by the All India Rural Credit Survey, produced in 1954, gave the most important rural credit initiatives that the bank was going to take in the coming years. The Reserve Bank of India Act of 1934, played a major role in the development of banks in the sphere of agriculture. Bank played a negligible role in the rural sector until independence after which it started taking initiative in the marketing of crops or other seasonal operations. From lending a meager amount of one lakh to the cooperative banks in 1945-46, it went on to Rs.5.37 Crores to the cooperative banks for rural credit. A series of amendments were made in bank’s founding act and some of them widened the ambit of ‘marketing of crops’, ‘seasonal agricultural operations’, ‘crops’ in order to finance the cottage and small scale industries and this also enabled cooperative banks to lend for medium termed periods. The All India Rural Credit Survey Committee is the foundation for making a policy for the development of Institutional credit structures. This committee showed how institutional credit was not reaching the rural sector and proposed that many other committees and recommendations should be integrated and reorganized in order to tackle this problem. Services area approach, priority sector lending, NABARD, lead bank scheme are some of the results of this report. In the recent times, the Agriculture Credit Review Committee, established in 1989, was set to see the rural credit system in detail. It showed the true Picture and analyzed the gap between the cost incurred by the rural credit institution and the income generated by these institutions and 12 | P a g e
suggested that it needed external assistance to fill this gap. It also recommended that commercial banks should be given greater autonomy. It asked for reduction of political interference in cooperatives. Then came the Narshimam Committee in 1991, which suggested the redefinition of the priority sector and also recommended that the interest rates should be deregulated.
A DEVELOPMENTAL ROLE: Reserve Bank of India’s developmental role can be classified into two categories- Firstly, it helped in building an initial institutional infrastructure and secondly, acted as a financial system for the small scale industries.
INSTITUTIONAL INFRASTRUCTURE:
The RBI and the Indian
Government disagreed on the scope of studying the financial requirements in the private sector. Taking into consideration the views of both, the then finance minister and the RBI, a committee was created with Mr. A.D.Shroff(from TATA Sons) as its Chairman. As per the report of the Shroff committee it had been recommended to the bank that it should resort to refinance term loans given to industry by various, commercial banks. Initially, the RBI was reluctant to advance medium term loans to the industry. Gradually, with time, the banks opinion and view started attaining a moderate stage. Proposal came up to form a refinance corporation (in the form of a public company) under Company’s Act. However, later, RBI decided that the corporation would be a private company and would work tly with The State Bank of India, Life Insurance Commission and 14 other scheduled banks, the selection of which was based on their deposits. It was decided that the corporation would have a share capital, valued at Rs.25 Crores. The system was that, if loans were advanced by any member bank to an industrial concern i.e. medium sized, and the amount of such loan (given for a period of 3-7 years) did not exceed Rs.50 Lacs, these loans would be eligible for getting refinance under the umbrella of the quota decided for each member bank. “These loans were to be made for the purpose of increasing production, primarily to industries included in 5- year plans. In order to ensure
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that medium-sized firms benefitted from the lending facility, a ceiling of Rs.2.5 Crores was stipulated for the pay-up capital and reserves of borrowing concerns”13. In the initial years the corporation’s performance was below the expectation. The scenario was deteriorating. In response to this, the corporation undertook liberalization of its refinance facilities in 1960. Refinance facilities were extended to the financial corporations of states and also to the state co-operative banks. In spite of this, a lump some proportion of refinance was accessed by the commercial banks. “Besides testifying to their success, the sharp increase in the 'outgo of funds' from the corporation after the liberalization and diversification measures of 1960-61 signified the accelerated tempo of private investment activity in industry and helped illustrate the latent demand within the country for an expanded industrial financing agency” 14. Thus, the Industrial Development Bank of India was formed in order to meet the above demand. With growing industrial activity, the recommendation of the Shroff committee was recalled. The committee recommended that investment trusts should be formed in both public as well as private sectors in order to spread and promote industrial activity and investment. This called for the creation of unit trusts that would regulate the mobilization of resources for promoting industrial development and democratization of the concept of share ownership, like what has been envisaged in the Indian constitution under the heading of Directive Principles of State Policy. However, there was an anticipated fear that there would be intense competition among the unit trusts which would in turn limit the amount of business and hence, viability of these unit trusts was also feared. Instead, a body called the unit trust of India was set up, that would now act as a “de facto public sector monopoly”15. Thus, the RBI had played a major role in building a proper industrial infrastructure.
13 Volume II, RBI History, Building and Institutional Infrastructure, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90034.pdf 14 Volume II, RBI History, Building and Institutional Infrastructure, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90034.pdf 15 Volume II, RBI History, Building and Institutional Infrastructure, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90034.pdf 14 | P a g e
TO THE SMALL SCALE INDUSTRIES: As a major part of India’s industrialization strategy, small scale industries (cottage industries) have always been considered important. In order to speed up the development of such industries, a network of agencies was formed during the implementation of the first five year plan. However, the scheduled banks, the state financial corporations etc. hesitated to closely finance these small scale industries, mainly because they were seen as credit risk areas. Thus, the small scale industries received only a minimal proportion of the entire credit. In this scenario, it is the Reserve Bank of India that played an imporatnat role in “establishing or ing institutions intended to enlarge the flow of credit to small industries and in encouraging existing institutions, notably the State Bank of India, to launch more liberal schemes to finance small industries in collaboration with statelevel institutions”16. However, when these steps did not yield any result, the RBI started engaging itseld by identifying the needs and requirements of these industries, since the late 1950’s. The bank itself came up with a scheme that would guarantee and advance institutional loans to the small scale and cottage industries and would refinance the lending of commercial banks o these industries at certain concessional rates. Among these small scale industries, it was the handloom industry, that was labour intensive was given careful treatment. Thus the RBI not only experienced the problems of providing financial to the small scale industries at the same time also, played its part in various attempts to resolve such problems.
16 Volume II, RBI History, Financing Small Industries and Exports, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90035.pdf 15 | P a g e
Third Phase: 19671981:Nationalization of Banks THE DEFINING EVENT: BANK NATIONALIZATION In the month of July 1969, such an economic event took place that even for the subsequent three decades, its effect still reverberates in the Indian economy-the Government of India brought about the nationalization of 14 private sector banks. In the period 1951-1966 efforts were constantly being made to strengthen commercial banking that was then very fragile. The spread of banking started increasing. However, one major problem was that the expansion of banking took place mainly in the urban areas, the semi-urban areas as well as the rural areas went unnoticed. Due to this, various economic activities in sectors like agriculture, small scale industries, self employed groups failed to have access to any proper banking facility. This 16 | P a g e
scenario led to a common political perception, according to which the private banks were unaware of their responsibilities towards the society and its requirements of credit. In this situation, under the influence of the report of Economic Programme Committee of AICC( All India Congress Committee) it was felt necessary to bring about the nationalization of banks as an integral step in order to establish a just social order. The situation in the country was such that India had been disastrously defeated by the Chinese, Indian treasury was empty, public morale was low, prices were rising and a general rule of dissatisfaction against the Government was brewing up. In the midst of constant battle for succession, among the congress leadership, Lal Bahadur Shastri was appointed as the Prime minister. Ms. Indira Gandhi succeeded him. In order to secure the vote and hence the of the poor people, she brought about the nationalization of banks. The main objective of this event was said to be “to serve the cause of economic growth more effectively and to make credit available to the producers in all fields where it is needed”17.
FURTHER DETAILS OF THE SOCIAL CONTROL OF BANKS: In the 1960’s there were constant debates about certain issues- social control of the banks and its adequacy, need for an outright nationalization. Finally, in 1969, the issues were resolved as the Prime Minister Ms. Indira Gandhi gave her decision in the favor of Bank Nationalization. This called for a new age in Indian banking. However, in order to expand the process of credit delivery, two things were essential- first, expansion of the branches and second, increase in number of lonable funds. To the second requirement, the Reserve bank of India, turned back to the bill market scheme of 1952. The purpose was to provide the banks with a particular mechanism that would help them obtain certain advances from the bank. The RBI hoped that undertakings in the public sector would provide the market with a substantial resource of bills and would thus provide an impetus towards making the system of bills popular as a financial instrument. The enter][p;kjprises in the public sector were of the view that they were not 17 Volume III,RBI History, The defining Element Pg 1, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90069.pdf 17 | P a g e
convinced whatever the bank was asking them because it differed with their operational structure and different perceptions about the utility of a new revised billing scheme. In 1967, the RBI, in collaboration with the polity of the country came up with the idea of ‘social control’ of banks. Indira Gandhi promoted the idea of bank nationalisation as part of her election manifesto in 1967. When the Banking Commission was created, it took in-depth consultation from the Governor and Deputy Governor of RBI before submitting the final report. B N Adarkar, the then Deputy Governor also sent a detailed commentary on the report. The Government also extensively consulted the RBI regarding the issue of social control. The making of the final social control scheme saw the predominant role played by the RBI for the same. The Finance Ministry prepared legislation along with the RBI, for the setting up of a National Credit Council. This shows the deep and pervasive control of the RBI in the parliamentary law making relating to economic policies and also in the governmental decision-making process.
VENTURING OVERSEAS: ‘The Reserve Bank of India is empowered by the Banking Regulation Act to issue licences to commercial banks incorporated in India to open a branch or office either in India or Even foreign banks require a licence from the RBI to open its branches in India. abroad.’ 18Till the 1970s, three factors influenced the RBI’s policy regarding the indigenous banks venturing into foreign markets: foreign exchange requirements for the setting up of a bank office abroad; the consideration of business potential that depended on the number of ethnic Indians residing in the country in question; and importantly, the issue of reciprocity. The Reserve Bank had taken cautious moves while permitting Indian banks to open offices overseas, because it was unfavourable that foreign banks reciprocated by opening their own branches in India. This would have two severe effects: firstly, that the businesses of Indian banks in India would be hit, and secondly, the bank would have to allow remittance of profits to overseas banks for functioning in India. The reciprocity factor had a direct connection with India’s international economic relations in general, and its bilateral relationship with the country concerned. This brings to the fore an important role of the RBI, that of a of India’s foreign relations. A lot would depend on 18 Venturing Overseas, RBI History, Volume III, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90072.pdf 18 | P a g e
each of the RBI’s discretion to grant or not a licence to an Indian bank to expand its functions abroad or to a foreign bank to set foot in India. Post the 1970s, the Reserve Bank has been increasingly liberal in granting licences, as a result of improvement in the economic condition and increased competency of Indian Banks, all of which has again happened due to the efforts of the central bank.With the onset of the social control era, the Bank’s positive contribution to the farmers of the country also escalated. ‘The possibility of commercial banks providing agricultural credit in increasing measure became evident’ 19. ‘Thus, from the mid-1960s the role of the RBI became more varied, inasmuch as it began to emphasise a multi-agency approach to rural credit, and integration of term lending and working capital finance.’20
BANK AND THE FARMERS:+ The Reserve Bank of India, since the first phase just after its formation has been giving a careful focus to the issue of agricultural credit to the farmers. This was being done mainly by the mechanism of cooperative credit facilities. However, as time ed, mainly in the period of the middle part of the 1960s, the Reserve Bank of India’ s approach towards agricultural credit started changing, in that, it started adopting a more multi agency approach. “Institutional finance for agriculture grew sharply during the late 1960s and 1970s. The main institutions to provide credit were the state cooperative banks, primary agricultural credit societies, land development banks and scheduled commercial banks including RRBs”21
RECENT PHASE OF RBI 1991-2006: THE REFORMS PHASE 19 The Bank and Farmers, RBI History, Volume III, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90074.pdf 20 Id. 21 Volume III, RBI History, Bank and the Farmers, Page 266, http://rbidocs.rbi.org.in/rdocs/content/PDFs/90074.pdf 19 | P a g e
RBi has undergone radical changes in its role and functions for the last ten to fifteen years since the 1990’s. Macroeconomic policies were being overhauled from a setup of a mixed economy to the setup of a competitive and open market. Moreover, before 1991, RBI’s role was more of ‘nation-centric’. However, gradually it was becoming ‘world-centric’. This was mainly to bring the Indian economy at par with the norms set by the IMF (International Monetary Fund) WTO (World Trade Organization), IBRD(International Bank of Reconstruction and Development) so that India could compete with the global economic challenges. In the year 1991, the M.Narshimham committee through its report talked about reforms in both financial and banking sectors by way of removing any kind of restriction on the expansion and entry of private and foreign banks. As per the report, Indian and foreign banks could enter into t ventures. Now, increased priority was being given to factors like profitability of the bank, efficiency of customer service etc. The Statutory Liquidity Ratio(SLR) and Cash Reserve Ratio(CRR) got reduced, also adequacy of capital and a greater credit portfolio was made available for the banks. Th other changes include encouraging mutual fund companies and financial companies to invest in the stock market of India, which brought about an unexpected hike in the stock market. Significant inflow of capital from FDI’s and FII’s started. This in turn made it necessary to convert Indian currency to dollars. Indian firms were being allowed to raise funds or invest abroad. It was at this period after independence, that Indian banking as well as financial systems were being globalized.
WORLD CLASS SERVICES IN BANKING: In the recent phase RBI’s main aim has been integrating the world class services in finance sector coupled with maximum profits and operational efficiency. The RBI’s contributions in the recent phase include: a) A projectile growth of 7-8% in the annual income b) Stability in the prices by controlling inflation rate between 3%-5% c) Monetary stability by facilitating and encouraging in flow of not only foreign capital but also foreign exchange reserves. d) Maintaining stability in the exchange range e) Adherence to deficit financing norms which were seen as % of GDP f) Introduction of knowledge based technologies that would promote profits, efficiency in operations, pricing, cash management services.
SOME MAJOR IMPACTS OF THE REFORMS: a) FOREX Management: 20 | P a g e
“Reverse accumulations, which are long drawn out and considerable in size, have the propensity to generate a number of risks, in-cluding near termed inflation. Other risks may be in the form of monetary imbalances, high intervention costs, over heated credit and asset markets, liquid and distorted banking systems” 22. India, being an enmerging economy has been an accumulation of foreign exchange reserves since a couple of years. In the recent phase, the RBI has chalked out policies that are likely to counter and neutralize the adverse impact of reverse accumulation. b) Monetary Reforms: The RBI in recent years has become more capable to respond to emergency situations and shocks. This is mainly due to the novel financial and monetary reforms. Moreover, the new monetary policies have also proved to be effective in aiding the RBi proceed from the instruments of monetary control that are direct to the indirect instruments. Also, the RBI now relies less on CRR or Cash Reserve Ratio and other reserve requirements as monetary control instruments, As a result, CRR has fallen from 15% (1994-1995) to 5%(2000’s).
c) Capital Flow Management: Due to proper FOREX management, the net assets of foreign exchange were increasing too. In order to reduce such expansionary effect of increasing NFA’s (Net Foreign Exchange Assets), the RBI has started conducting sales of certain governing securities belonging to its own portfolio, in open market . In order to smoothen this process, the RBI has brought about the operation of the market stabilization schemes (MSS), which now acts as an instrument required for management of liquidity. This instrument is like an arrangement between the bank and the Indian Government to prevent excess of liquidity that might be created due to accumulation of NFA’s of the RBI. c) Reforms in Monetary Sector: “Non-food credit growth of scheduled commercial banks has remained nearly in the same range of
Rs.3,76,000 Crores (as compared to Rs.3,70,899 Crores of the previous
22 RBI and financial reforms edited by: K M Parchure ,ACFAI University Press ,Pg18 21 | P a g e
year). The years 2006 and 2007 witnessed a rise in bank credits to the agricultural sector”23. An approximate growth of 33% was seen in bank credits during the years 200607. Growth was also seen in the services sector at around 31%. This rapid growth was sured by an almost 27% growth in personal loans. Bank deposits have also been continuously rising at rates higher than that of rise in advances and loans. d) External Sector:
In the year 2006-07 export growth was seen at 22.5% as against the 23.4% of the last year. Continuous deficit has been seen in balances of the visible trade s but it has been rigorously compensated by steady increase in annual income from the ‘invisible receipts’-management consultancies, software services, other financial services. Under the foreign direct investment, foreign institutional investment, NRI deposits etc. huge inflows of capital have been received. In fact, the foreign exchange reserves level stood at nearly 200 billion by the end of March 2007.
RECENT MONETARY POLICIES (2007-2008)- A REVIEW: a) The GDP growth for the period January to March 2007 stood at 9.1% as against 10% of the last year. Real GDP in sectors like agriculture, service sector and industries also increased in 2006-07 as compared to 2005-06. b) Within the last four year period beginning from 2003-04, RBI has helped in achieving a trajectory growth of income from 5% to a bracket of around 9% per annum. Thus, RBI has been a major driving force of change resulting in macro economic growth, the impact of which is clearly visible in greater in flows of FII’s and FDI’s. Also, changes have been seen in the Indian stock market within the four year period shown by an increase in sensex from 12,000 points to 15,000 points. c) During the last four year period besides the service sector, the manufacturing sector has
also contributed 10% per annum to the area of national income. Improvements have also
23 RBI and financial reforms edited by: K M Parchure ,ACFAI University Press, Pg 20 22 | P a g e
been seen in the profit margins of the industries. Overall, there has been high confidence and optimism in business. Thus, in the recent phase, the Reserve Bank of India has been emerging as a major facilitator of not only monetary and banking policies but also, in the implementation of macroeconomic policies. Roles and functions of the RBI have also undergone radical changes because of the new commitment that RBI has now-international sensitivity of Indian economy.
CURRENT ROLE: One of the most pivotal functions of the central bank of any country is framing of the monetary policy, both short term as well as long term, for the economic governance of the country. ‘Monetary policy is the macroeconomic policy laid down by the central bank to control money supply in the economy. It involves management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth and liquidity.’ 24 In the Indian context, the monetary policy framed by the RBI aims at managing the money market in quantitative in order that it meets the demands of the various sectors of the economy, and increasing the growth rate of the national economy. Another crucial tool used by the central bank is the fiscal policy. A fiscal policy, unlike monetary policy, concerns itself with government spending and revenue collection in order to influence and regulate the macroeconomic productivity levels.
IN THE TENURE GOVERNOR:
OF
RAGHURAM
RAJAN
AS
After assuming office of the 23rd Governor of RBI, Dr. Raghuram Rajan issued a statement wherein he acknowledged the current precarious condition of the Indian economy caused 24 Economic Times, Definition of Monetary Policy, http://economictimes.indiatimes.com/definition/monetary-policy 23 | P a g e
primarily by global financial markets, and went on to articulate his plans and intentions to propel the Indian economy on a favourable path. He emphasised on the main function of RBI as stipulated by the Preamble of the RBI Act, 1934, of creating and maintaining monetary stability in the economy, by particularly dealing with the value of the Indian Rupee and the incessant problem of inflation. He has ordered committees to be formed to come up with recommendations for formulating the monetary policy framework. This suggests to us that the mandate of the RBI, by virtue of which it constitutes committees, which involve not only officers of the central bank, but also external experts, both national and international, has become very wide in the recent years. Also considerable is the fact that the recommendations of these committees are only advisory in nature, the final call being reserved with the Reserve Bank, implying that the central bank has gained a highly concentrated autonomy regarding economic policy decisions. Secondly, Mr. Rajan focussed on that role of the RBI, which is becoming increasingly significant in the wake of an open, liberalised economy and volatility in the global economy—the RBI’s developmental role. Technically being an instrumentality of the state, the RBI has a duty of socialist action as its important and indispensable role. With this in mind, Rajan iterated that he would focus on poverty alleviation and growth harmoniously, by increasing access to finance for the poor, rural small and medium scale industries. This will serve a dual purpose, the other being growth increment through smaller industries at a time of stymied growth rate of larger industries. The RBI can also be seen to be going in for decentralisation of its mandate. (domestic banks will no more have to approach the RBI for opening new branches). This situation allows us to analogise this power of RBI with the power of delegated legislation, available to the government and other public authorities by provision of the Constitution.
24 | P a g e
PREDICTION OF FUTURE ROLE ‘We will not stop with these licenses. The RBI has put an excellent document on its website exploring the possibility of differentiated licenses for small banks and wholesale banks, the possibility of continuous or "on-tap" licensing, and the possibility of converting large urban cooperative banks into commercial banks. We will pursue these creative ideas of the RBI staff and come up with a detailed road map of the necessary reforms and regulations for freeing entry and making the licensing process more frequent after we get comments from stakeholders.’25 25 id 25 | P a g e
The coming into being of the proposed Indian Financial Code, the RBI’s role may be curtailed to make it more specific in nature. The Indian Financial Code Bill seeks to limit the role of the RBI to monetary management. If this should happen, the RBI’s responsibilities will only get concentrated to monopolise its power on the monetary facet of the economy.
The Reserve Bank is undertaking diversified responsibilities, one of them being research. It encourages research not just from its professional staff but also people from the teaching and student fraternities. This concept of knowledge sharing is bound to grow in the future with increase in complexity of the economy and specialisation.
With currency related crimes increasing, RBI has to upgrade its responsibility as a watchdog and bring in measures to curb the menace. It may have to set up required institutions or machinery for the same. Crime prevention will be an important role for the RBI in the coming time.
India is a welfare state and RBI is an agent of this state. It has been carrying out large functions that are socialistic and people oriented, in a successful manner. A lot still needs to be done in the developing economy of India. For this, the RBI must gear itself up for increased future challenges on the social front, with a clear and definitive strategy in the apprehension of growing political intervention. In the wake og the severe cyclone Phailin in the state of Odisha in October 2013, the Odisha State Government knocked the RBI’s doors for immediate intervention in facilitating government payments towards relief expenditure. This exemplifies that the RBI is also steadily attaining the role of a shock absorber in the Indian economy. It has to keep its policies and financial conditions in such a manner that it will be able to proactively perform a disaster management role in the years to come.
CONCLUSION: 26 | P a g e
Thus, after the survey of the roles of the Reserve Bank of India in different phases, it is clear that, the Bank’s function has changed with years. Such changes have made the Bank only more adaptive to the changing financial and social scenario in the emerging economy of India. Considering its current role, The Reserve Bank of India plays a major part in determining the future of Indian economy and its position in the global scenario.
27 | P a g e
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