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90 years of the Reserve Bank of India (RBI)

Economy03 Apr 2024| A-AA+

In News

  • The Reserve Bank of India (RBI), which was established on April 1, 1935, is responsible for monetary stability, currency management, inflation targeting, regulating the banking system, and setting interest rates.
History of RBI
  • Legislation to set up the Reserve Bank of India was enacted in March 1934, and the provisions relating to the constitution of the bank, issue of share capital, and establishment of central and local boards became operative from January 1, 1935.
  • The first Governor of the RBI was the Australian Sir Osborne Arkell Smith, one of the two managing governors of the Imperial Bank of India.
  • Sir C D Deshmukh was the first Indian to become Governor.
  • Following Partition, it was agreed that the RBI would cease to be the currency authority for Pakistan, and Indian notes would cease to be legal tender in Pakistan.
  • The RBI’s relationship with the government has been testy at times. But the bank has been steadfast in defending its turf whenever the government has tried to interfere.
Reforms of 1991
  • A sharp increase in oil prices in August 1990 led to an acute economic crisis, making the balance of payments situation unmanageable, depleting foreign exchange reserves along with massive capital outflows, and pushing India close to default.
  • The RBI transferred more than 46 tonnes of gold from its reserves to the Bank of England to borrow forex to manage immediate liquidity problems. The rupee was devalued twice, by 9% and 10%, in three days.
  • Full convertibility of the rupee on trade account was allowed, giving more flexibility to trade.
  • Banking reforms were announced, the setting of interest rates by lenders was deregulated, and new private bank licences issued between 1991 and 1995.
Manmohan & Pranab
  • In 1982, Prime Minister Indira Gandhi brought Manmohan Singh, then Member Secretary of the Planning Commission, to the RBI to succeed I G Patel as Governor.
  • Singh, who held office till January 14, 1985, prepared the groundwork for strengthening monetary policy actions, and banking reforms got a boost.
2008 crisis and after
  • India escaped the 2008-09 global financial crisis through a combination of management, structure, and luck.
  • Pre-crisis, the policies of Governor Y V Reddy against capital inflows, especially to the real estate sector, and against rapid foreign bank expansion, were timely. Post-crisis, management was excellent, and appropriately measured.
  • Under Subbarao, the RBI opted for a liberal accommodative policy to salvage economic growth.
  • Raghuram Rajan announced plans to internationalise the rupee, float inflation bonds linked to the consumer price index, steps to boost exports and increase inflows, and plans to review the monetary policy process, and gave banks freedom to open branches without having to approach the RBI for licences.
Demonetisation of 2016
  • On November 8, 2016, the government announced the demonetisation of Rs 500 and Rs 1000 notes of the Mahatma Gandhi Series.
  • It also announced the issuance of new Rs 500 and Rs 2000 notes in exchange for the demonetised notes.
  • The sudden withdrawal of notes created a liquidity shortage in the country.
  • There were long queues outside banks, and people faced immense hardships across the country.
  • It also roiled the economy — demand fell, businesses faced a crisis, and GDP growth declined close to 1.5 per cent.
  • Many small units reported huge losses even after nine months. The pace of remonetisation was slow.
  • Managing the situation was one of the biggest challenges faced by RBI.
Source- Indian Express