Origin and History of Reserve Bank of India

The genesis of Reserve Bank of India (RBI) started in 1926 when the Hilton-Young Commission  or the Royal Commission on Indian Currency and Finance made recommendation to the British Government of India  for creation of a central bank. The chief objective of such recommendation were twofold:

  • To separate the control of currency and credit from the government
  • To augment banking facilities throughout the country.

To give effect to above recommendations, a bill was introduced in Legislative Assembly in 1927 but this bill was withdrawn because various sections of the people were not in agreement.

The recommendation to create a reserve bank was made by White Paper on Indian Constitutional Reforms. Thus, a fresh bill was introduced and was enacted in 1935.

Thus, Reserve Bank of India was established via the RBI Act of 1934 as the banker to the central government. RBI launched its operations from April 1, 1935. Its headquarters were in Kolkata in the beginning, but it was shifted to Shahid Bhagat Singh Marg, Mumbai in 1937.
Prior to establishment of RBI, the functions of a central bank were virtually being done by the Imperial Bank of India, which was established in 1921 by merging three Presidency banks. It was mainly a commercial bank but also served as banker to the government to some extent.

It’s worth note that RBI started as a privately owned bank. It started with a Share Capital of Rs. 5 Crore, divided into shares of Rs. 100 each fully paid up. In the beginning, this entire capital was owned by private shareholders. Out of this Rs. 5 Crore, the amount of Rs. 4,97,8000  was subscribed by the private shareholders while Rs. 2,20,000 was subscribed by central government.

After independence, the government passed Reserve Bank (Transfer to Public Ownership) Act, 1948 and took over RBI from private shareholders after paying appropriate compensation. Thus, nationalisation of RBI took place in 1949 and from January 1, 1949, RBI started working as a government owned central bank of India.

 Key Landmarks in the journey of RBI

  • In 1926, the Royal Commission on Indian Currency and Finance recommended creation of a central bank for India.
  • In 1927, a bill to give effect to the above recommendation was introduced in the Legislative Assembly, but was later withdrawn due to lack of agreement among various sections of people.
  • In 1933, the White Paper on Indian Constitutional Reforms recommended the creation of a Reserve Bank. A fresh bill was introduced in the Legislative Assembly.
  • In 1934, the Bill was passed and received the Governor General’s assent
  • In 1935, Reserve Bank commenced operations as India’s central bank on April 1 as a private shareholders’ bank with a paid up capital of rupees five crore.
  • In 1942 Reserve Bank ceased to be the currency issuing authority of Burma (now Myanmar).
  • In 1947, Reserve Bank stopped acting as banker to the Government of Burma.
  • In 1948, Reserve Bank stopped rendering central banking services to Pakistan.
  • In 1949, the Government of India nationalized the Reserve Bank under the Reserve Bank (Transfer of Public Ownership) Act, 1948.
  • In 1949, Banking Regulation Act was enacted.
  • In 1951, India embarked in the Planning Era.
  • In 1966, the Cooperative Banks came within the regulations of the RBI.
  • Rupee was devaluated for the first time.
  • In 1969, Nationalization of 14 Banks was a Turning point in the history of Indian Banking.
  • In 1973, the Foreign Exchange Regulation act was amended and exchange control was strengthened.
  • In 1974, the Priority Sector Advance Targets started getting fixed.
  • In 1975, Regional Rural Banks started
  • In 1985, the Sukhamoy Chakravarty and Vaghul Committee reports embarked the era of Financial Market Reforms in India.
  • In 1991, India came under the Balance of Payment crisis and RBI pledged Gold to shore up reserves. Rupee was devaluated.
  • In 1991-92, Economic Reforms started in India.
  • In 1993, Exchange Rate became Market determined.
  • In 1994, Board for Financial Supervision was set up.
  • In 1997, the regulation of the Non Banking Financial Companies (NBFC) got strengthened.
  • In 1998, Multiple Indicator Approach for monetary policy was adopted for the first time.
  • In 2000, the Foreign Exchange Management Act (FEMA) replaced the erstwhile FERA.
  • In 2002, The Clearing Corporation of India Ltd Started operation.
  • In 2003, Fiscal Responsibility and Budget Management Act (FRBMA) enacted.
  • In 2004, Liquidity Adjustment Facility (LAF) started working fully.
  • In 2004, Market Stabilization Scheme (MSS) was launched.
  • In 2004 Real Time Gross Settlement (RTGS) started working.
  • In 2006, Reserve Bank of India was empowered to regulate the money, forex, G-Sec and Gold related security markets.
  • In 2007, Reserve bank of India was empowered to regulate the Payment systems.
  • In 2008-09, world under the grip of Global Financial Slowdown, RBI Proactive.

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