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 RBI5-8
2. Second Phase: 1951-1967: The years of Policy Formations9-15
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 Banks16-19
a) The defining event: Bank Nationalization
b) Further detail of Social Control of Banks
c) Venturing overseas
Recent Phase of RBI19-24
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 Indias
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 terms. 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, Tannans Banking Law and Practice in India, Reserve Bank of India as
Central Bank, p. 333.
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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 Indiathe management of
Government accounts 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
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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 1930s to
2000s. 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
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1935, RBI, assumed the functions of the Controller of the currency and from the Imperial Bank
of India of the task of managing Government accounts, 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 Indias 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 accounts 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 future4 . 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
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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 Indias 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 Indias own outlook. However, the next two
years saw sharp rise in Indias 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 Indias requirements.
As a result, the Indian revenue account 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 account,
especially through additional taxation, so as to meet Recoverable War Expenditure to a greater
extent5. 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 passed: the Board of the
Reserve bank is alarmed at the continued accumulation of sterling even after the termination of
the war and requests6.

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
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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 Customs Act 1878, time
and again. It was only in 1947 that a separate Foreign Exchange Regulation Act was passed. 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 Banks 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 passed, 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
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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 RBIs 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
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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 accounted 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 supportive of it. The RBI was of the view that, deficit
financing helped the Government to accomplish goals that could not be supported 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 1940s however the implementation of action in order
to carry out this responsibility was made in 1950s. 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 banks
founding act and some of them widened the ambit of terms 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
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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 Indias developmental role can be classified into two categories- Firstly, it
helped in building an initial institutional infrastructure and secondly, acted as a financial support
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 Companys Act.
However, later, RBI decided that the corporation would be a private company and would
work jointly 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 concerns13.
In the initial years the corporations 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 monopoly15. 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
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 SUPPORT TO THE SMALL SCALE INDUSTRIES:

As a major part of Indias 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 supporting 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 institutions16. 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 1950s. 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 support 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
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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
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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 support 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 needed17.

FURTHER DETAILS OF THE SOCIAL CONTROL OF

BANKS:
In the 1960s 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 RBIs 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 Indias 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 moderator of Indias foreign relations. A lot would depend on
18 Venturing Overseas, RBI History, Volume III,
http://rbidocs.rbi.org.in/rdocs/content/PDFs/90072.pdf
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each of the RBIs 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 Banks 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 passed, 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 RRBs21

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
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RBi has undergone radical changes in its role and functions for the last ten to fifteen years since the
1990s. Macroeconomic policies were being overhauled from a setup of a mixed economy to the setup of
a competitive and open market. Moreover, before 1991, RBIs 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 joint 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 FDIs and FIIs 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 RBIs main aim has been integrating the world class services in finance sector coupled
with maximum profits and operational efficiency. The RBIs 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:
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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%(2000s).

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 NFAs (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 NFAs 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
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year). The years 2006 and 2007 witnessed a rise in bank credits to the agricultural
sector23. 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
surpassed 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 accounts 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 FIIs and FDIs. 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
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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 terms 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
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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 economythe RBIs
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
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The coming into being of the proposed Indian Financial Code, the RBIs 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 RBIs
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 RBIs
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:
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Thus, after the survey of the roles of the Reserve Bank of India in different phases, it
is clear that, the Banks 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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