The Reserve Bank of India completed seventy
eventful years of its existence in 2005. It is one of the oldest central banks
in the developing world. Over this fairly long period, the Bank has grown in
size and complexity and has undergone continuous transformation in terms of
organisational set up and management. With this backdrop, it was considered
appropriate to devote the theme of the Report on Currency and Finance, 2004-05
to the ‘The Evolution of Central Banking in India’. This volume of the Report
on Currency and Finance incidentally coincides with the release of the Volume
III of the history of the Reserve Bank of India for 1967-1981.
Since the introduction of theme based Reports
in 1998-99, the Department of Economic Analysis and Policy has released six
Reports encompassing several important contemporary issues concerning India.
However, the current Report is a unique departure as it attempts to analyse
and present the Reserve Bank’s evolution over the last seventy years in the
backdrop of development of central banking worldwide. Although it is not easy
to analyse the conceptual evolution of a central bank over seventy years in
an annual publication like this, sincere efforts have been made to cover the
vast canvas of operations of the Reserve Bank in its multifaceted role.
The functions of central banks have undergone
significant transformation alongwith the evolution of their respective financial
systems and stages of economic development. Central banks have served as a reservoir
of expertise that is generally drawn upon by governments and institutions, both
domestic and international. Understandably, central banks have always occupied
centre stage in the financial system in all countries. The Reserve Bank has
also undergone continuous transformation in the backdrop of the changing environment
while formulating and implementing monetary and financial policies since its
inception in 1935. The functions of the Reserve Bank have emerged out of a diversity
of roles entrusted to it. In this context, the key functions that have been
examined in this Report are regulation and supervision, development of financial
markets, the monetary and fiscal interface and dynamics of its balance sheet.
The evolution of monetary policy was the theme of the Report on Currency and
Finance last year and has, therefore, not been addressed in detail here.
The operations of the Reserve Bank of India
have been marked with great flexibility in responding to domestic necessities
and compulsions, with an endeavour to align regulation and supervision with
international best practices with suitable adaptations. The Reserve Bank has
been constantly refining its operating procedures and instruments in the direction
of developing sound financial markets and financial infrastructure. The Reserve
Bank has acquired technical expertise over the years in developing the government
securities market and in managing government borrowings. This has enabled it
to efficiently discharge the twin responsibilities of debt and monetary management,
while meeting Government borrowing requirements and market expectations. The
balance sheet of the Reserve Bank has undergone a fundamental change over the
past seven decades alongwith transformation of the Indian economy. In recent
years, the relative significance of foreign assets has increased and that of
domestic assets has declined.
The Report has also attempted to trace the
organisational evolution and management development of the Reserve Bank since
its inception and has brought out the changing role and functions of the Bank
over seventy years of its existence.
The Report has been drafted by a core team
in the Department of Economic Analysis and Policy under the overall guidance
of Narendra Jadhav, Principal Adviser and Chief Economist. The core team comprised
K.Udaya Bhaskar Rao, Balbir Kaur, S.M.Pillai, Asha Kannan, Gunjeet Kaur, Nishita
Raje and D.Bose. The drafting of the Report was extensively assisted by A.Karunagaran,
J.K.Mallik, Siddartha Sanyal, Ramesh Golait, L.Lakshmanan, Deepa Raj, Indranil
Bhattacharyya, S. Suraj, S. M. Lokre, Snehal Herwadkar, Sangeeta Misra, Satyananda
Sahoo, Amar Nath Yadav, Jai Chander, Rajeev Jain, Raj Rajesh, A.K.Shukla, Pankaj
Kumar, P.K.Bhoite and S.K.Takle.
Valuable contributions were made by M.R.Nair,
Janak Raj, Charan Singh, Partha Ray and Sunando Roy from within the Department;
Sandip Ghose and Bazil Sheikh from Human Resources Development Department; and
G.Gopalakrishna, K.V.Subba Rao, Amarendra Mohan and P.Ravi Mohan from Department
of Banking Supervision provided relative inputs at various stages of preparation
of the Report.
The significant contributions by operational
departments, viz., Human Resources Development Department, Department
of Banking Supervision, Department of Banking Operations & Development,
Department of Information Technology, Legal Department and Department of Government
and Bank Accounts are highly appreciated. Almost every officer of the Department
of Economic Analysis and Policy was associated in the preparation of Chapter
II of this Report which deals with the ‘Recent Economic Developments’.
The core team also benefited from the discussions with Shri
S.S. Tarapore, Dr. A. Vasudevan and Prof. Dilip Nachane.
The task of tracing the evolution of central
banking in India has been difficult. Our effort has been to outline the conceptual
evolution of the Reserve Bank as it has changed through the country’s independence
and many different phases of economic and financial development in India. In
reviewing its functions through the seventy years of its existence, one feature
stands out: the continuous transformation that has been experienced by the Reserve
Bank of India in response to changing circumstances. Other central banks have
also changed very substantially over the years. Thus, we can look forward to
continuing change in the future alongwith the very significant transformation
taking place in the financial sector internationally, particularly with the
information technology revolution continuing to progress, accompanied by ever
increasing openness of economies.
I take this opportunity to place on record
my deep appreciation of the professional skills and utmost dedication of the
officials of the Reserve Bank, without which it would have been not possible
to bring out this Report.
Rakesh Mohan
Deputy Governor
March 18, 2006