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RBI and its Impact on the Development Process of India By Ms Kumudaxi Verma MBA (First Year), Everonn IIPS

Panchkula

Abstract Central banks are very old institutions. The Bank of England was set up way back in 1694, the Bank of France is more than 200 years old and the Federal Reserve Bank was set up in 1913. Traditionally, central banks have performed roles of currency authority, banker to the Government and banks, lender of last resort, supervisor of banks and exchange control (now it would be more appropriate to call it exchange management) authority. Indias financial system works through two primary organs the Finance Ministry at the union government level and Reserve Bank of India (RBI). RBI has an important role to decide and drive the monetary policy. The RBI was established through Reserve Bank of India Act, 1934 and had started its operations in 1935 (Reddy, 2007). Earlier it was governed through a share capital and board of directors, but under Banking Regulation Act, 1949 it was nationalized. RBI is a generic central bank, and is banking services regulator in our country. The RBI has contributed to the development of our national economy and development of the nation through various means at its disposal. On one hand it has pioneered growth of many development banks and other financial institutions; while at the same time monitored, controlled and regulated money supply. The developmental contributions prior to economic liberalization of 1990 were of a different kind, while post 1990; it has more monitoring and regulatory efforts. Objective of Paper The objective is to study the role of RBI in the development process of our country during the last 65 years. In specific, the study aims to: 1. 2. 3. 4. 5. Study the constitutional responsibility of RBI. Its relationship with Indian Economy. Role in the development process prior to economic liberalization. Role during post 1990 period. Challenges affecting assigned role.

Literature Review 1. 2. Theoretical Framework

Assigned Role of RBI. Specifically, the role of the RBI is as follows; 1. Issue to currency/notes. Printed in 07-08 1393 Cr. 2. Banker, agent and advisor to the union government. Issue, management and admin of public debt. 3. Bankers bank. 4. Custodian of foreign exchange reserve. 5. Regulation of banking system licensing, management, branch operations, inspection, issue direction, 6. Clearing house functions. 14 clearing houses in the country. 7. Credit control. Other functions of RBI. These include Agricultural credit; Industrial finance; Publication of data; Banking education and training; Remitting facility; Conversion of currency; Accepting deposits; Transactions with foreign institutions; Transaction in precious metals; Expansion of banking facilities; Supply of development finance Assigned development functions of RBI 1. Development of Financial System. 2. Development of Agriculture Agri Refin Devp Corp (ARDC), NABARAD and RRBs. 3. Provision of Industrial Finance. Set up ICICI Ltd, SIDBI, EXIM bank. 4. Staff training. 5. Data Collection. 6. Promotion of exports through refinance. 7. Inculcating good banking habits. Problem Identification The RBI has a specific assigned role during its formation as a central bank. During the intervening period, many new developments have taken place and forced RBI to adapt to the new challenges. Such challenges continue and require the bank and government to review the international financial environment to adapt and remain effective. The constraints on RBI are mainly from the poor fiscal, management by the government. However, monetary policies also leave much to be desired as the problem emanates from economic policies held hostage by the political compulsions of the ruling parties. Should RBI be totally autonomous and what changes are feasible within our constitution? What kind of role the RBI has carried out towards development of India as a nation. Research Methodology The study is primarily a qualitative and thus has depended on primary data from both the government and private sources. Primary data is from my interactions and face to face interviews with some of the senior officials of the banking industry. Sample size

Data collation and analysis

Role of RBI in development process from 1948 to 1990 Reddy (2007) identifies that as per the the preamble to the RBI Act; the basic objective of the Bank is "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". Thus, there is no special mandate for partnering in the direct development processes or ensuring price-stability as we want the RBI to associate with. The objectives of monetary policy as growth incentive and price control have evolved over the these years till 1990. This was period of command economy and government run economic and trade policies. The RBI used tight foreign exchange control measures under the Foreign Exchange Regulation Act (FERA), 1973; which was punitive and regressive in nature. Role of RBI in development process from Post reform era In the post reform-era, RBI initiated measures to ensure safety and consistency of the banking system in the country. It also contributed to support banks to play an effective role in accelerating the economic growth process. One of the major objectives of Indian banking sector reforms was to encourage operational self-sufficiency, flexibility and competition in the system and to increase the banking standards in India to the international best practices (Reddy, 2002). Dwivedi et. al (2011) describe the development process of RBI and banking through two reform processes. The first reform focused on introduction of several prudential norms, major changes in the policy framework, and formation of competitive atmosphere. The second phase of reforms began in 1997 with aim to reorganization measures, human capital development, technological up-gradation, structural development which helped them for achieving universal benchmarks in terms of prudential norms and pre-eminent practices. Reddy (2007) states that compared to the situation before 1991, a transparent communications policy and a broad based consultative approach to policy making has been put in place in RBI, Governors speeches and appearances on the electronic media and the press have been substantial, having significant influence on markets and opinions. In the process, the RBI has gained reputational bonus and public credibility. The reform period has seen a gradual improvement in the effectiveness of monetary policy. As is seen from the planning commission reports, high growth along with price and financial stability has been maintained and adequate liquidity also remains in the market for development purpose. Challenges 1. Reduction in operating expenditures. 2. Reduction in NPAs by commercial banks as well as DFIs. 3. Identification and management of risks in FIs. 4. Corporate governance. 5. Improvement of bank asset qualities. 6. Better capital formation. 7. Increased role in regulation and monitoring of NBFCs. 8. Identification and prevention of banking frauds.

My study reveals that the financial sector reforms initiated in 1990s have yielded many positive results for the commercial banking sector. The reform process however, is far from over, and some of the crucial issues currently confronting the sector have been listed above. RBI has played a crucial role and is expected to play the same as an apex financial entity of the country. A couple of years back Jacques Delors, former president of European Commission, commented, "Not all Germans believe in God but they believe in the Bundesbank." Given the track record of the RBI in steering the financial sector towards efficiency, stability and prosperity, I am sure that in the near future all Indians would also have a similar attitude towards the RBI.

References Dwivedi A. K., Charyulu D. Kumara (2011). Efficiency of Indian Banking Industry in the PostReform Era. W.P. No. 2011-03-01; IIM Ahmedabad. Reddy Y.V. (2002), Monetary and Financial Sector Reforms in India: A Practitioners Perspective, The Indian Economy Conference, Program on Comparative Economic Development (PCED) at Cornell University, USA. Reddy Y.V (2007). Evolving role of the Reserve Bank of India: Recent Developments. Speech on the occasion of the Foundation Day of the Institute of Development Studies, Jaipur on June 30, 2007 (edited version).