CHAPTER 1Reserve Bank of India
1.1 INTRODUCTION ABOUT RBI
The Reserve Bank of India was established on April 1
st
, 1935 in accordance with the provisionsof the Reserve Bank of India Act, 1934. This marked the culmination of prolonged efforts,spanning more than a century, to setup a central bank in the country.
1.2 ESTABLISHMENT OF THE BANK
The efforts to setup a central bank in India started way back in January 1773, when WarrenHastings the then governor of Bengal recommended the establishment of a ‘General Bank inBengal and Bahar’. The Bank was setup in April 1773, but it proved to be only a short livedexperiment. The amalgamation of the three presidency banks was finally effected in 1921, andthe Imperial Bank of India was established. Though primarily a commercial bank, the ImperialBank undertook certain central banking functions also in particular, the function of bankers to thegovernment and to some extent the banker’s bank. However the regulation of note issue and themanagement of foreign exchange became the direct responsibility of the Central Government. In1926, the Royal Commission on Indian currency and finance (Popularly known as the HiltonYoung Commission), recommended that the dichotomy of the functions and division of theresponsibility for control of currency and credit should be ended. The commission thereforesuggested the establishment of a central bank, to be called the ‘Reserve Bank of India’, bycharter, independently of the Imperial Bank, whose separate continuance was considerednecessary for enlargement of banking facilities throughout the country.
1
The Gold Standard and the Reserve Bank of India Bill to give effect to the commission’srecommendation, introduced in the Indian Legislative Assembly in January 1927, did not makemuch headway and was dropped on account of sharp differences of the Bank’s ownership andconstitution and composition of its Board of Directors. The issue emerged again in 1930-31 inthe context of the debate on constitutional reforms for the country. The white paper on the IndianConstitutional Reforms published in 19333, underscored in its proposals the transfer of theresponsibility at the centre from British to Indian hands, and the need for establishment of Reserve Bank of India free from political influence. Meanwhile, the Indian Central BankingEnquiry Committee (1931) had also strongly recommended the establishment of Reserve Bank of India at the earliest. These events lead to a fresh Bill being introduced in the IndianLegislative Assembly on December 22
nd
, 1933 and by the Council of State on February 16, 1934.It received the Governor General’s assent on March 5
th
1934. Certain Sections of the ReserveBank of India Act were brought into force on January 1
st
, 1935 and rest of the sections on April1, 1935. After the completion of preliminaries, the Bank commenced operations on April 1,1935.
1.3 CORE FUNCTIONS OF THE BANK
The basic function of the bank, according to the preamble of the reserve bank of India act is to ‘regulate the issue of bank notes and the keeping of reserves with a view to securing monetarystability in India and generally to operate the currency and credit of the country to its advantage.’This function imposes on the bank the responsibility of:
•
Operating monetary policy for ensuring price stability and ensuring adequate financialresources for development purposes
•
Promotion of an efficient financial system and
•
Meeting the currency requirement of the public
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In the process of discharging these responsibilities the bank, over the years, has acquired a widerange of promotional and developmental roles. The functions of the bank also warrant acomplementary impact on the government’s efforts to accelerate and sustain growth of theeconomy through planned development process and to realize its socio-economic goals.The demands and events during the first 15 years of the bank’s existence were marked by theconsolidation of its traditional central banking functions, namely, those of note issue and banker to the government, apart from attending to the problem of war and post-war finance, repatriationof sterling debt, setting up of a system of exchange control and tackling the banking an monetary problems which arose from the partition of the country.The bank functions as the note issue authority, banker’s bank, banker to the government andregulator of the financial system. The bank has the sole right to issue currency notes and also actsas the banker to commercial banks, holding custody of their cash reserve and granting themdiscretionary financial accommodation. For the performance of its duties as the regulator of credit, the bank possesses not only the usual instruments of general credit control such as bank rate, open market operations and the power to vary the reserve requirements of banks, but alsoextensive powers of selective and direct credit regulation.Another important function of the bank relates to the conduct of the banking and financialoperations of the government and tendering advice to it on economic matters in general and onfinancial problems in particular. The bank advises the government on public debt managementand operationalizes the government borrowing programmes.The bank has an important role to play in the maintenance of the stability of the external value of the rupee for the purpose of realizing the viability of external sector and ensuring monetarystability. The bank also acts as the agent of the government in -respect of India’s membership of the international monetary fund. It exercises control over payment and receipts arising frominternational financial transactions under current and capital accounts and regulates the flow of foreign exchange for sub serving the objective of control of current account deficit.
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