PM Modi to attend RBI's 90th year celebrations tomorrow, recognizing its strong foundation

There aren't many institutions in India that have a history of 90 years and are still surviving and thriving.

The Reserve Bank of India (RBI) is one such institution that is entering its 90th year tomorrow ( April 01, 2024). To mark this occasion, Prime Minister Narendra Modi is flying down to Mumbai to grace the event at Mumbai's National Centre for the Performing Arts.

Established on April 1, 1934, the RBI's history dates back to 1925 when the Royal Commission on Indian Currency and Finance recommended the creation of the RBI to maintain the country's monetary stability. The RBI commenced its operations on April 1, 1935, with Sir Osborne Smith as the first Governor, responsible for functions such as currency issuance, banking services for banks and the government, and the development of rural cooperatives and agricultural credit. Smith's tenure lasted until June 1937. That was the year when the Central Office of the Reserve Bank was also shifted from  Kolkata to Mumbai.

In its nine decades of history, the RBI has seen twenty-six Governors, with Shaktikanta Das as the current Governor, whose tenure started in October 2021. The past Governors were mostly outsiders , bureaucrats and also economists like IG Patel, Manmohan Singh, C Rangarajan ,  Bimal Jalan,  Raghuram Rajan,  Urjit Patel etc. M Narasimham was actually the first RBI cadre officer to reach the governor's post.

Over the years, the RBI's role has expanded to cover monetary management, regulation and supervision of the financial system, management of foreign exchange, currency issuance, regulation and supervision of payment and settlement systems, and developmental roles.

Let's examine the significant achievements of the RBI as an independent institution.

The size of the Reserve Bank’s balance sheet currently stands at Rs 63 lakh crore as of March 31, 2023. To put things in perspective, the size of the RBI's balance sheet is bigger than the annual budget of the government, which is around 47 lakh crores. The RBI's balance sheet is the outcome of the various roles it plays, from being the banker to the government, issuer of currency, maintaining price stability (inflation), and foreign exchange management. These operations result in the creation of money as the demand in the economy grows, the outflow and inflow of rupee resources to contain inflation by reducing money supply, and also protect the currency's exchange value by selling dollars in case of a sudden depreciation, which brings rupee resources back to the central bank. The strong balance sheet actually helped RBI to provide liquidity support post Covid when it pumped in US$ 227 billion, which was close to 9 per cent of GDP. 

India's foreign exchange reserves currently stand at a staggering USD $642 billion, making them the fourth-highest in the world after China, Japan, and Switzerland. These forex reserves play a crucial role in supporting the stability of the rupee's value. This level of forex reserves is sufficient to cover 10-12 months of import bills. In the early 1990s, India's reserves could only cover 5 weeks of imports, leading to a balance of payments crisis when the country needed foreign currency to pay its import bills. Since then, India has implemented a policy of gradually building adequate foreign exchange reserves. This strategy has helped the country weather global crises like the 1997 East Asian currency crisis, the 2008 Lehman Brothers collapse and financial crisis, the 2013 taper tantrum, the COVID-19 pandemic, and more recently, the conflicts between Russia-Ukraine and Israel- Under Governor Das, the RBI has pursued a more aggressive policy of building forex reserves. Strong forex reserves and currency stability have boosted the confidence of foreign investors, particularly those bringing foreign direct investment (FDI), foreign portfolio investment (FPI), and private equity capital into India.

The RBI's role in inflation management or price stability has also evolved over the years. A flexible inflation targeting framework was established in 2016. For decades, the RBI Governor decided the direction of interest rates in the economy. The new system was implemented due to disagreements between the government and the RBI regarding interest rate movements in the early part of the 2010s, during Duvvuri Subbarao's tenure as Governor. The Congress-led UPA government insisted interest rate cuts to support growth, while the RBI prioritized keeping inflation low. When the BJP-led NDA government came into power, the parliament mandated a six-member Monetary Policy Committee (MPC) – three members from the RBI and three nominated by the government. This aligns with global standards, as central banks worldwide follow a committee approach. For example, the Federal Open Market Committee consists of a dozen members. The inflation target set for the MPC is 4 percent, with a lower range of 2 percent and an upper range of 6 percent. So far, the new framework has been functioning effectively.

The RBI also plays a crucial role in regulating the financial services sector. Over the last decade, the RBI has implemented a number of initiatives aimed at reducing non-performing assets (NPAs) or hidden NPAs in banks' books. While the Insolvency and Bankruptcy Code (IBC) has played a significant role, the RBI's proactive measures have also been instrumental. Currently, banks maintain a comfortable capital adequacy ratio of 15-16 percent, with net NPAs standing at less than 1 percent and a return on assets (ROA) of 1.2 percent. In addition, the RBI serves as a lender of last resort during financial crises. In fact, the RBI has intervened to rescue failing banks such as Yes Bank and Lakshmi Vilas Bank. It has also helped in the recovery of funds in cases likes IL&FS, Reliance Capital, and DHFL.

In the last decade, the RBI has been playing an important role in promoting digital payments. Currently, UPI, which is an instant account to account transfer,  handles a staggering 12 billion transactions per month, with a total value reaching 18.23 lakh crore in December alone. In terms of total retail payments, UPI commands a 21 percent share in transaction value for the fiscal year 2022-23, while NEFT holds 51 percent, and paper-based transactions at 11 percent. Within just seven years, UPI has secured a fifth of the market share. 

Over the next 5 years,  UPI is poised to further erode the shares of NEFT and paper-based cheque transactions. The scale of UPI transaction is such that it will soon threaten the global payment networks. Visa handles 212 billion debit and credit transactions annually, followed by Mastercard with 170 billion transactions. UPI is already at 150 billion transactions annually. In the  next 2-3 years, India  will surpass the combined transaction volume of both Mastercard and Visa.