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RBI celebrates 90 years

Prelims Only | Economics | Mains Paper 3: Indian Economy
Note4Students

From UPSC perspective, the following things are important :

Prelims level: Evolution of RBI's Monetary Policy

Why in the News?

The first monetary policy of RBI Governor Sanjay Malhotra in 2025 marks 90 years since the Reserve Bank of India (RBI) announced its inaugural monetary policy in 1935.

RBI’s First Monetary Policy in 1935

  • On July 3, 1935, RBI set the bank rate at 3.5%, reflecting the Imperial Bank’s rate.
  • The CRR was set at 5% of demand liabilities and 2% of time liabilities on July 5, 1935.

Evolution of RBI’s Monetary Policy

  • Bank Rate in Early RBI History:
    • The bank rate was a key tool introduced by the RBI in 1935 to control credit and liquidity. On July 3, 1935, the RBI set the bank rate at 3.5%, mirroring the rate of its predecessor, the Imperial Bank of India.
    • The RBI Act (1934) mandated its use for buying or re-discounting commercial paper, and it played a crucial role in India’s interest rate structure.
  • Role of Cash Reserve Ratio (CRR):
    • The CRR, introduced by the RBI, required banks to maintain a percentage of their deposits as reserves.
    • Influenced by the Federal Reserve Act of the USA, the CRR helped stabilize the banking system, especially during failures.
    • The CRR was set at 5% for demand liabilities and 2% for time liabilities in 1935, with adjustments made over time.
  • Exchange Rate Management
    • In 1935, the RBI managed the exchange rate of the 1 Indian rupee at 1 shilling and 6 pence.
    • This caused friction between nationalists, who favoured a lower exchange rate to boost exports, and the British, who preferred a higher rate to facilitate cheaper imports.
  • Disputes Between Government and RBI
    • The RBI’s decision to reduce the bank rate in 1935 was opposed by the government, fearing rupee depreciation.
    • This led to a conflict, resulting in the resignation of Osborne Smith, the first RBI Governor.
    • The incident highlighted tensions between the RBI’s monetary autonomy and government priorities.

About Reserve Bank of India (RBI)

  • The RBI is the central bank and monetary authority of India established on April 1, 1935, under the Reserve Bank of India Act, 1934.
  • Its idea was incepted from the recommendations of the Hilton Young Commission.
  • Sir Osborne Arkell Smith, an Australian, served as the inaugural Governor.
  • He was succeeded by Sir C D Deshmukh, the first Indian to hold the position.
  • It is a centralized institution for India to effectively regulate its monetary and credit policies.
  • RBI had its initial headquarters in Kolkata, later moving permanently to Mumbai in 1937.
  • Initially, the RBI operated as a privately owned entity until its full nationalization in 1949.

Functions and Initiatives:

  • Monetary Authority: The RBI controls the supply of money in the economy to stabilize exchange rates, maintain a healthy balance of payment, and control inflation.
  • Issuer of Currency: Sole authority to issue currency and combat circulation of counterfeit notes.
  • Banker to the Government: Acts as a banker to both the Central and State governments, providing short-term credit and financial advisory services.
  • Lender of Last Resort: Provides emergency liquidity assistance to banks during crises.
  • Custodian of Foreign Exchange Reserves: Manages foreign exchange reserves and administers the Foreign Exchange Management Act, 1999 (FEMA).
  • Regulator and Supervisor of Payment and Settlement Systems: Oversees payment and settlement systems in the country, ensuring efficiency and security.
  • Credit Control and Developmental Role: Promotes credit availability to productive sectors and fosters financial infrastructure development.

Dr. Ambedkar’s Role in the Establishment of RBI:

  • Dr. B.R. Ambedkar’s contributions were particularly notable during the Hilton Young Commission discussions in 1926, where he presented his recommendations based on his book “The Problem of the Rupee – Its Origin and Its Solution.”
  • These discussions laid the foundation for establishing the RBI on April 1, 1935.

 

[UPSC 2004] Consider the following statements:

1. Reserve Bank of India was nationalized on 26 January 1950.

2. The borrowing programme of the Government of India is handled by the Department of Expenditure, Ministry of Finance.

Which of the statements given above is/are correct?

(a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2

 

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