Summary: The Reserve Bank of India (RBI), established on April 1, 1935, played a pivotal role in shaping India’s modern economy. Its creation was guided by the Hilton Young Commission’s recommendations, and its founding objectives included regulating banknotes, ensuring monetary stability, and operating the credit system. Initially set up as a private entity, it was nationalized in 1949. Over the years, the RBI has evolved through various milestones such as the establishment of significant financial institutions like the Deposit Insurance Corporation and Industrial Development Bank of India. Its governors, ranging from Sir Osborne Smith to Dr. Yaga Venugopal Reddy, have contributed significantly to strengthening the banking system, with notable achievements during economic crises and liberalization phases. The RBI has also played a crucial role in rural finance, banking reforms, and the introduction of financial instruments. Its journey reflects India’s transition from colonial financial management to a modern, self-reliant economy, constantly adapting to the evolving financial landscape. Interesting anecdotes, like the discontinuation of the ‘pie’ coin and the introduction of ‘Yaksha’ and ‘Yakshini’ sculptures at its New Delhi office, highlight the bank’s blend of traditional values and forward-thinking leadership.
The mighty Reserve Bank of India had its birth in 1935, a long 89 years ago with scholarly twists based upon its Governors who were hand picked by the Government of Britain or the Government of India after the independence of the Indian nation. Its chronicled history is available in three volumes: Volume 1: 1935-1967, Volume 2: 1951-1967 and Volume 1967-1981. Its juicy evolution symbolizes the birth of Indian economy in modern terms, how the British used it more for meeting the second world war, and more how it is now considered as the most modern institution of monetary matters, regulator of the most dynamic Indian banking system, and all the more introducing the latest innovations in central bank system in the world.
Let’s travel with its mighty twists, ups and downs and finally how you are safe with the modern commercial bank which houses your savings and other accounts.
Reserve Bank of India (For obvious reasons, my article intersperses its matter directly from RBI web site and perhaps the language used there is a reader’s delight. I may quote them as and when I need.)
The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank, which commenced operations on April 1, 1935.Perhaps the last Royal commission to do this. A message was sent by the Viceroy to the Governor, Osborne Smith when the Reserve Bank of India commenced its operations on 1st April, 1935
Why was it constituted?
Regulate the issue of banknotes
Maintain reserves with a view to securing monetary stability and
To operate the credit and currency system of the country to its advantage.
Interesting titbits
I could count 16 members of the Board which was privately owned. Got nationalized in 1949. The Board of Directors considered it as premature.
Do you visualize that “The Share Issue of the Bank offered in March, 1935 was the largest share issue in India at the time. The matter was further compounded by the conditions and restrictions imposed under the Act. These conditions related to qualifications of the shareholders, the geographical distribution and allotment of shares (to avoid concentration of shares and to ensure that those holding the shares were fit and proper.
Share certificates from different colour registers had different colours.” Managing this new concern is Mr. W.T. Mc Callum from the Imperial Bank of India. He has a staff of 180. The Bank will have no branches but will work in mofusil through the branches of the Imperial Bank. The Reserve Bank Head Office is situated in Calcutta.
The Reserve Bank opened by taking over the Public Debt Office, the Public Accounts Office and the Currency Department, along with Bankers’ clearing house added later on.
An interesting feature of the Reserve Bank of India was that at its very inception, the Bank was seen as playing a special role in the context of development, especially Agriculture. When India commenced its plan endeavours, the development role of the Bank came into focus, especially in the sixties when the Reserve Bank, in many ways, pioneered the concept and practise of using finance to catalyse development.
The Bank was also instrumental in institutional development and helped set up institutions like the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India, the Industrial Development Bank of India, the National Bank of Agriculture and Rural Development, the Discount and Finance House of India etc. to build the financial infrastructure of the country.
With liberalisation, the Bank’s focus has shifted back to core central banking functions like Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System and onto developing the financial markets.
From 01.04.1985, till 06.09.2003, the names of the following RBI governors along with their photos and a brief of their achievements are available in RBI web site given in the reference section. Some unknown but masterly actions of some of the RBI governors are as under:
Sir Osborne Smith was the first Governor of the Reserve Bank. A professional banker, he served for over 20 years with the Bank of New South Wales and 10 years with the Commonwealth Bank of Australia before coming to India in 1926 as a Managing Governor of the Imperial Bank of India. But his variance in views on interest rates and exchange rates made him to resign before completing his term of appointment.
Sir James Braid Taylor was a member of the Indian Civil Service and had served for over a decade in the Currency Department of the Government of India, initially as a Deputy Controller, later as Controller of the Currency, and thereafter as additional secretary in the Finance Department. He was closely associated with the preparation and piloting of the Reserve Bank of India Bill. He served as Deputy Governor of the Bank prior to his appointment as the Governor. Definitely, he succeeded.
Mr. Chintaman Dwarkanath Deshmukh, a member of the Indian Civil Service, was the first Indian Governor of the Bank. His association with the Bank commenced in 1939, when he was appointed Government’s liason officer. He later served as Secretary and thereafter in 1941 as Deputy Governor of the Bank. On the demise of James Taylor, he took over stewardship of the Bank and was appointed Governor in August, 1943. He has shown remarkable performance.
Sir Benegal Rama Rau, K. G. Ambegaokar, , H V R Iengar, all members of the Indian Civil Service, an era of British civil service as Governors initiated the formation of Deposit Insurance Corporation, one of the few countries to do this noble job for deposit holders, conversion of Imperial bank as State Bank, initiation of co-operative credit under the domain of the Reserve Bank etc.
What is the other epoch-making events in the evolution of RBI?
Nationalization of banks amongst fierce struggles with the owners of the then commercial banks, creation of N I B M, establishment of Unit Trust of India/ Industrial Development Bank of India, usage of Cash Reserve Ratio as a monetary measure, credit guarantee corporation as a measure for extending credit to the neglected sections of the society, establishing Regional Rural Banks to reach the rural areas, initiating banking reforms after availing the financial assistance from IMF, setting up of the Discount and Finance House of India, the National Housing Bank and the Indira Gandhi Institute of Development Research
In the field of rural finance, the Service Area Approach was adopted as an catalyst for the flow of credit through commercial banks.
During the tenure of Mr. S. Venkitaramanan, as the Governor, the country had to tide over the balance of payments crisis. His term also saw India adopt the IMF’s stabilisation programme where the Rupee underwent a devaluation and the launch of the programme of economic reforms.
The professional economists, namely, Dr. C Rangarajan and Dr. Bimal Jalan brought professional approach during their reign as the governors.
Dr. C. Rengarajan:
His tenure as a Governor saw unprecedented central bank activism. New institutions and instruments like establishment of unified exchange rate and signing of the memorandum between RBI and the Government whereby a cap was put on the automatic finance by the bank to the government in the form of ad hoc treasure bills. He continues to lecture, advise, and write articles/books.
Dr. Bimal Jalan:
The bête noire of the developing and under development countries, the Asian Crisis was weathered during his regime, and he ensured the consolidation of the gains of liberalisation and economic reforms. The monetary policy process was demystified and central bank communications marked a perceived shift towards transparency. A feeling of emanation from the British empire or the Imperial Bank was boldly inculcated among country men by his bold leadership.
This period saw a slew of measures to strengthen the banking sector, establish new institutions and introduce new instruments. The period has been characterised by the strengthening of the balance of payments and forex position, low inflation and soft interest rates.
His extensive understanding of the Indian banking system was wisely used even after his retirement.
Dr. Yaga Venugopal Reddy the twenty-first Governor, was a member of the Indian Administrative Service. He has spent most of his career in the areas of finance and planning. He served as Secretary (Banking) in Ministry of Finance.
Dr. Reddy has made significant policy contributions in the areas of financial sector reforms; trade finance; monitoring of balance of payments and exchange rate; external commercial borrowings; centre-state financial relations; regional planning; and public enterprise reform and has been closely associated with institution building. He has several publications to his credit mainly in areas relating to finance, planning and public enterprises.
I did not cover the reigns of recent governors which were considered as current ones in my view.
Let me enlighten you with the trivia or anecdotes as informed to us by their wise web site.
Anecdote 1 – The Humble Pie
Towards the nineteenth century, the pie was the smallest minted coin in India. It constituted 1/3 rd of a pice and was officially termed 1/12th of an Anna. 3 pies made a pice; 4 pice made an anna and 16 annas made a rupee. One rupee, thus consisted of 192 pies. (No wonder arithmetic daunted the faint-hearted then!!)
In the wake of the second world war, India witnessed an inflationary situation as well as a scarcity of metals that had to be imported. It was in this context of rising prices that the minting of the copper pie was discontinued after 1942.
Ten years later, there was a proposal by the Mint Master that the pie be reintroduced as a part of the coinage of Republic India. The proposal, however, was very gently squashed by the then Finance Secretary, Shri K.G. Ambegaokar on cost-benefit considerations.
Ambegaokar stated
“Much as I admire the valiant efforts made to rescue the ‘picayune coin’, I must, I am afraid, albeit with a heavy heart, write
The Epitaph of the Pie
Low and high
We all will sigh
When the poor little pie
Bids her last goodbye.
But her cost’s is so high;
And what can she buy?
What trade can she ply?
She needs must eat the humble pie;
Thus, the pie became a collector’s item and may fetch million times its value when we become a super power economically in 2034.
Anecdote 2: The Dividend Warrant
The Reserve Bank of India was set up as a share holders’ bank. The share flotation in March 1935 was the largest of its kind ever attempted in the country. Despite this, the issue was heavily oversubscribed. The image on the side is a picture of one of the first dividend warrants issued in 1936 to the shareholders.
It is interesting to observe the rate of dividend as well as the rate of Income Tax is expressed in absolute terms, i.e., in rupees, annas and pies.
The rate of dividend is indicated as 2 rupees and 10 annas.
The rate of income tax is indicated on the certificate as 30 1/3 pies per rupee.
India shifted to the decimal system in 1957 to avoid wasting of time in calculation like the rest of the world.
Anecdote 3: Of Art, Central Banks, and Philistines
On achieving independence, the government planned a number of public buildings to house the institutions of independent India. In this context, Pandit Jawaharlal Nehru, the Prime Minister, suggested that public buildings, many of which were large imposing structures, could be utilised to ‘encourage Indian artists to function in some way’ and sculptors, painters, designers, etc. could be asked to cooperate. Nehru opined that the art work ‘…should cost very little in comparison with the total cost of the buildings. But it will encourage Indian artists and would be greatly welcomed, I think, by the public’.
Based on the wisest words of our first and worthy Prime Minister Panditji, the Bank set up a committee consisting of Shri J.D. Gondhalekar, Dean of the J.J.School of Arts, Bombay, Shri G.M. Bhuta of M/s Master, Sathe & Bhuta and Shri R. D. Pusalkar, Assistant Chief Accountant of the bank to examine the proposal and to make recommendations on the subject.
Committee recommended that sculptures could be erected on either side of the main entrance of the RBI office at New Delhi, one depicting the idea of “prosperity through industry” and the other “prosperity through agriculture”. At the instance of J.R.D.Tata, the then Director of the Central Board, the views of Carl Khandalawalla, an eminent critic and connoisseur of art, were sought. It was he who suggested that the Bank could consider having figures of “Yaksha” and “Yakshini” on the two sides. On his advice, the invitation to tender for the adornment of the frontage of the New Delhi Office was extended to the nine artists. An eminent sculptor, Shri Ramkinker was chosen and he built the statues.
You can proudly see Yaksha and Yakshini at the entrance of the main building of RBI today in New Delhi.
Under anecdote 4, one of the letters received by RBI and how it was disposed of have been dealt with humour and empathy.
Anecdote 5
Of Aspirants, Pensioners and Continuity
It narrates the story of ten thousand applications being received for 50 positions in RBI Calcutta and the sad state of affairs in recruiting the employees of RBI. The case of an employee with 7 extensions, allowing a service of 50 years and not recruiting a young man/woman is vividly explained.
Conclusion
Tempted by the humoristic web site of RBI which narrates its evolution from no where to be one of the best managed Central banks, this article took birth. The sweet smiling RBI baby passes through many stages firmly rooted by our brilliant Governors among whom some resigned to show their independence and courage to withstand the government and its instructions.
I hail RBI for its noble service in the past, present and uncertain future. Yes, our future is safe under its ever-watchful eyes.
Strong minded can read the three publications brought out by RBI.
Friendly advice: My intention is to bring to your notice the evolution of RBI as narrated by RBI. Being neither a legal advice nor a consultancy, please write to RBI, read its publications for authenticity.
Reference
https://www.rbi.org.in/commonman/english/History/Scripts/Mis_Ane_OfAspirants.aspx
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