Origin of the RBI:
Before the establishment of Reserve Bank of India, there have been a few efforts to establish a central bank in the country. The earliest attempt has been traced back to 1773, when Warren Hastings, the Governor of Bengal, proposed to establish a central bank in the country and recommended that a “General Bank in Bengal and Bihar” be established.
The Report of the Chamberlain Commission in 1913 also recommended establishing a central bank in the country. As a supplement to this report, Professor J.M. Keynes planned out the first comprehensive plan for an Indian central bank. This plan, however, did not come into existence until the outbreak of the First World War.
In 1921, the Imperial Bank of India was set-up by combining the three Presidency Banks, which were performing a few central banking functions, though primarily they remained as a commercial bank. Before the establishment of the Reserve Bank of India in 1935, the Imperial Bank served as a banker to the government and in some capacity as banker’s bank.
The Central Bank in India was established as it was stressed by the Royal Commission on Indian Currency and Finance also known as the Hilton-Young Commission in 1926. The Commission suggested to set up a central bank and to be named “Reserve Bank of India” for the country’s central bank. In January 1927, a bill was introduced in the Legislative Assembly but was dropped due to conflict with the constitution. In 1931 the Indian Central Banking Enquiry Committee made a case that supported the establishment of a Reserve Bank.
To establish the central bank in the country again received serious attention with the publication of a White Paper on Indian Constitutional Reforms. This paper insisted that the British make a shift in the transfer of responsibility from the Central Government to Indian hands via the means of Reserve Bank that will be free from political influences.
Eventually, a fresh bill was introduced in the Indian Legislative Assembly in 1933. The bill was passed and received the assent of the Governor-General on March 6, 1934, and was renamed as the Reserve Bank of India Act, 1934. In accordance with this Act, the Reserve Bank of India was established and it commenced operations from April 1, 1935.
Evolution of Ownership
Originally, the Reserve Bank was constituted as a shareholders’ bank, as it was based on the model of leading foreign central banks of those days. though a few shares were held by the government the majority owners were private entities. Hence, the central bank had private ownership.
However, with time the need for close integration of the monetary and credit policies of the bank and the macro-economic policies of the Government, the notion of state-owned central bank was raised and justified from time to time.
After independence, the Government of India took the decision to nationalize the Reserve Bank and introduced the Reserve Bank (Transfer to Public Ownership) Act, 1948. This Act transferred the ownership of RBI from private shareholders to the Government. On January 1, 1949, the Reserve Bank of India commenced its function as a state-owned central banking institution.
Functions of the RBI
Issue of Bank Notes:
The Reserve Bank of India has the sole right to issue currency notes with the exception of one rupee notes which are issued by the Ministry of Finance. Currency notes issued by the RBI are declared unlimited legal tender throughout the country.
This notes issue function with the Reserve Bank has numerous advantages that are
i. There is uniformity in issue of the notes.
ii. This makes possible effective state supervision.
iii. This makes it easier to control and regulate credit in accordance with the requirements as arose in the economy;
iv. The faith of the public in the paper currency is maintained.
Banker to Government:
As bankers to the government, the RBI manages the banking needs of the government. It maintains and operates the government’s deposit accounts. Further, it collects receipts of funds and makes payments on behalf of the government. RBI represents the Government of India as a member of the IMF and the World Bank.
Cash Reserves of Commercial Banks:
The commercial banks grant the custody of their deposits to the Reserve Bank. In return the, RBI acts as the cash reserves of the commercial banks.
Country’s Foreign Currency Reserves:
The RBI has custody of the country’s reserves of international currency, which enables the Reserve Bank to deal with any crisis connected with an adverse balance of payments position.
Lender of Last Resort:
Commercial banks as a last resort approach the Reserve Bank in times of emergency in case of any financial difficulties. The Reserve bank comes to their rescue even though sometimes it might charge a higher rate of interest in such a case.
Central Clearance and Accounts Settlement:
The commercial banks have their surplus cash reserves deposited in the Reserve Bank, it becomes easier to deal with each other and settle the claim of each on the other through book-keeping entries in the books of the Reserve Bank. The function of the clearing of accounts has now become an essential function of the Reserve Bank.
Controller of Credit:
Credit money forms the most important part of the supply of money in recent times. The supply of money has important implications for economic stability, the importance of the control of credit arises. Credit is controlled by the RBI in accordance with the economic priorities as set by the government.
“The views of the authors are personal“
Frequently Asked Questions
When was the Reserve Bank of India established?
The Central Bank in India was proposed by the Hilton-Young Commission in 1926. The Reserve Bank of India was established and it commenced its operations from April 1, 1935.
Was the RBI always controlled by the Government of India?
Initially, RBI was established as a private Bank but with time the government realized the need to establish as a bank that has to be state-owned. Closely after the Independence, the Central Bank was converted into the State-Owned Bank.
What are the main functions of the RBI?
The functions of RBI are as follows:
1. Issue of Bank Notes
2. Banker to Government
3. Reserves cash for Commercial Banks
4. Country’s Foreign Currency Reserves
5. Lender of Last Resort
6. Central Clearance and Accounts Settlement
7. Controller of Credit