April 12, 2024


RBI @90 – How has it performed?

The Reserve Bank of India (RBI) has a long and storied history in the Indian economic and growth story. The RBI has seen its fair share of trials and tribulations the Indian and world economies have been through and had to react almost in real-time. It’s no easy feat, especially when the RBI has to function through different governments of differing ideologies.

Celebrating 90 years, the RBI has increasingly been under the spotlight in recent years as it helps India navigate a post-pandemic world. There’s even more attention on its thinking behind interest rate changes, what the RBI Governor feels about the economy, and so on. How has it fared over the decades?


The Hilton Young Commission recommended that India have a central bank, and thus, the RBI was formed on April 1, 1935, through the 1934 Reserve Bank of India Act. The RBI took over government functions that were until then performed by the Controller of Currency, and others like managing the government and public debt from the Imperial Bank of India.

It was initially a private shareholder bank but was nationalised in 1949. When India began to focus on agriculture, the RBI’s function came into focus. In the sixties, the RBI is credited with pioneering using finance to accelerate development. On the institutional side of things, it set up institutions like the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India, and the Industrial Development Bank of India, to name a few.

When India underwent its economic liberalisation transformation, the bank shifted back to its core functions – monetary policy, supervision and regulation of banks, and overseeing the payments systems. The RBI announced a slew of banking reforms, and new private banking licenses were announced between 1991 and 1995.

In the history of this famed institution, two notable people played vital roles – Manmohan Singh and Pranab Mukherjee. In 1982, Singh, then the Member Secretary of the Planning Commission, was brought in by Prime Minister Indira Gandhi to succeed IG Patel as RBI Governor.

Singh would later acknowledge that he had differences with the then Finance Minister Mukherjee. In particular, he didn’t want the government to approve a license to the Bank of Credit and Commerce International, once promoted by Pakistani businessman Aga Hasan Abedi. The government favoured it and would strip the RBI of its power to license foreign banks. Singh’s resignation in light of this was rejected since he was persuaded to stay on.

When Raghuram Rajan was RBI Governor, he announced plans to internationalise the rupee, boost exports, review the monetary policy process, and allow banks to open branches without asking the RBI for a license.

Under Governor Urjit Patel, the Monetary Policy Committee (MPC) chaired its first meeting in 2016 in the aftermath of the controversial implementation of demonetisation.

The RBI has seen the country and economy undergo significant changes and transformations in the years since – a global pandemic and increased digitisation where people were using digital payment methods than ever before. The rise of UPI and payment banks brought a new set of regulatory and policy challenges to the RBI’s doorsteps.

Now 90 years old, has the RBI been effective over the years? Or, has it fallen short?

VIEW: A vital player

90 years is a long time. The RBI has certainly stood the test of time to become a beacon of stability for India’s financial system. Just on a general level, it has managed to work through different eras of ideology and governments and successfully waded through ever-changing economic tides. When there have been differences of opinion, they’ve been handled relatively professionally and on a bilateral basis. That’s the mark of a rock-solid autonomous entity.

Such an institution’s mettle is often tested in times of crisis. When the 2008 crisis was spreading, the world’s financial systems weren’t as connected as they are now. The RBI had its task cut out. Its policy decisions and strong regulations insulated India from the worst of the crisis. It was able to manage the balance of payments and currency rates. As the pandemic set in, most of the support was through the monetary route. The RBI was able to deftly manage repo rates which haven’t caused any significant disruption.

The Indian banking space has faced several issues over the past decade. Bad loans plaguing the sector are well documented. Prodded by the RBI, the banks began to realise this, and the Insolvency and Bankruptcy Code (IBC) helped resolve most of it. The RBI’s inflation targeting has helped keep inflation in line with expectations. Thanks to the RBI, overseas banking failures haven’t affected what’s happening in India.

COUNTERVIEW: Ample room for improvement

There’s no doubt the RBI has played a vital role in India’s economic growth story. However, it hasn’t been all good news. Let’s take banking oversight and regulation. While improvements like lower non-performing assets (NPAs) have been noted, the sagas involving YES Bank and Infrastructure Leasing & Financial Services Ltd (ILFS) show there’s a need for enhanced oversight.

In the digital payment space, the troubles faced by Paytm Payments Bank signal continued issues regarding the transparency of regulated entities. The RBI has embraced technology and allowed India to become a leader in payment solutions. However, Paytm’s saga has exposed the idea that the RBI has a handle on things in this space. It has been unable to balance regulation and innovation in this case.

It’s also necessary to go back to the 2008 crisis and examine the RBI’s response and performance. Some have noted two mistakes it made. First, it wrongly focused on the wholesale price index (WPI) when other indices pointed toward growing inflation. Second, when the WPI began to rise, the RBI didn’t respond quickly enough. After the crisis, many investment projects became unviable, and companies couldn’t repay their loans. The RBI’s restructuring schemes failed to resolve this. Its “extend and pretend” policy meant banks hid their bad loans for years.

Reference Links:

What is your opinion on this?
(Only subscribers can participate in polls)

a) The RBI has performed well over the years.

b) The RBI has fallen short of expectations.


For the Right:

New India’s great delusion. Decolonisation isn’t about erasing history, but moving forward

For the Left:

Narratives of hope vs despair