The Reserve Bank of India (RBI) was established in 1934 under the Reserve Bank of India Act. Initially privately owned, it was nationalized in 1949 and has since been fully owned by the Ministry of Finance, Government of India (GoI).
- Founding and Early Operations (1935-1949):
- Foundation: The RBI was founded on April 1, 1935, in response to economic troubles following the First World War. It was established based on the recommendations of the 1926 Royal Commission on Indian Currency and Finance (Hilton Young Commission).
- Seal and Symbol: The original seal of the RBI featured the East India Company Double Mohur with a lion and palm tree, later replaced by a tiger, India’s national animal.
- Functions: The preamble of the RBI describes its basic functions as regulating the issuance of banknotes, keeping reserves to ensure monetary stability, and operating the currency and credit system in the country’s best interest.
- Location: The Central Office was initially in Calcutta (now Kolkata) but moved to Bombay (now Mumbai) in 1937.
- International Role: The RBI acted as Burma’s (now Myanmar) central bank until April 1947 and served as the central bank for Pakistan until June 1948.
Post-Independence Developments (1950–1960)
- Economic Planning: Under Prime Minister Jawaharlal Nehru, the Indian government implemented centrally planned economic policies, focusing on agriculture. The government nationalized commercial banks and established central bank regulation through the Banking Companies Act of 1949 (later the Banking Regulation Act).
- Support for Economic Plans: The RBI was tasked with supporting economic plans by providing loans.
Banking Reforms and Expansion (1961–1968)
- Deposit Insurance System: In response to bank crashes, the RBI established a deposit insurance system on December 7, 1961, to restore trust in the banking system.
- Economic Development: The Indian government promoted the slogan “Developing Banking” and restructured the national bank market, leading the RBI to play a central role in controlling and supporting the public banking sector.
Nationalization and Regulation (1969–1984)
- Nationalization of Banks: In 1969, the government headed by Indira Gandhi nationalized 14 major commercial banks, followed by another six banks in 1980.
- Economic Regulation: The RBI increased its regulatory policies, focusing on interest rates, reserve ratios, and visible deposits to support economic development.
- Banking Commission: Established on January 29, 1969, the Banking Commission analyzed banking costs, legislation effects, and procedures, with R.G. Saraiya as chairman.
- Oil Crisis Response: During the 1973 oil crisis, the RBI restricted monetary policy to combat inflation.
Economic Reforms (1985–1990)
- Economic Analysis: Various committees analyzed the Indian economy, influencing RBI policies. The Board for Industrial and Financial Reconstruction, Indira Gandhi Institute of Development Research, and the Securities and Exchange Board of India (SEBI) proposed market reforms and investor protections.
- Financial Market Development: The Discount and Finance House of India began operations in April 1988, and the National Housing Bank was established in July 1988.
Liberalization and Modernization (1991–1999)
- Economic Crisis: In July 1991, the Indian rupee was devalued by 18% relative to the US dollar. The Narsimham Committee recommended financial sector restructuring.
- Private Banking: New guidelines in 1993 allowed for the establishment of private banks, reinforcing market liberalization.
- Stock Market: The National Stock Exchange of India commenced trading in June 1994, and nationalized banks were permitted to interact with the capital market.
- Currency Production: The RBI founded Bharatiya Reserve Bank Note Mudran Private Limited on February 3, 1995, to produce banknotes.
Recent Developments (2000–Present)
- Foreign Exchange Management Act: Came into force in June 2000, improving fund transfers and financial management.
- Security Printing & Minting Corporation: Established in 2006, it merged nine institutions to produce banknotes and coins.
- Economic Challenges: The growth rate of the national economy fell to 5.8% in the last quarter of 2008-2009, prompting the RBI to support economic development.
- Monetary Policy Committee: In 2016, the RBI Act was amended to establish the Monetary Policy Committee (MPC), limiting the RBI’s role in setting interest rates.
- Cryptocurrency Regulation: In April 2018, the RBI prohibited entities it regulated from dealing with virtual currencies. This decision was challenged, and in March 2020, the Supreme Court ruled that the RBI’s decision lacked sufficient justification.