The Reserve Bank of India (RBI) is India's central bank. The RBI handles many functions, including implementing monetary policy and issuing currency. India has reported some of the best gross domestic product (GDP) growth rates in the world. It is also known as one of the four most powerful emerging market countries, collectively part of BRIC nations, which include Brazil, Russia, India, and China. The bank, which is headquartered in India's finance capital, Mumbai, had $5.93 billion in assets.

Key Takeaways

  • The Reserve Bank is India's central bank.
  • It began operations in 1935—a year after the establishment of the Reserve Bank of India Act of 1934.
  • The RBI is responsible for regulating currency, securing monetary stability, maintaining currency reserves, and overseeing India's credit and currency system.
  • RBI Governor Shaktikanta Das was appointed in December 2018.
  • India's GDP was estimated to be $2.62 billion in 2020, making it the sixth-largest economy in the world.

History of the Reserve Bank of India (RBI)

The Reserve Bank of India began operations as the country's central bank in April 1935 following the establishment of The Reserve Bank of India Act of 1934. The Act provides the framework for the central bank, which was set up at the behest of the Hilton Young Commission, also called the Royal Commission on Indian Currency and Finance.

It originally served as a shareholder's bank until 1949 when it was nationalized. The central bank had a key role in the development of the nation's economy beyond just monetary and fiscal policy. Its development policies extended to other sectors, such as agriculture. It also helped set up a number of key national institutions, such as the Deposit Insurance and Credit Guarantee Corporation of India, the Industrial Development Bank of India, and the National Bank of Agriculture and Rural Development.

Over time, the bank shifted its focus, narrowing it down to the traditional functions of a central bank. It now has three main objectives, which include:

  • Regulating and issuing currency
  • Securing India's monetary stability by maintaining currency reserves
  • Overseeing and operating the nation's credit and currency system

The RBI is headed by Governor Shaktikanta Das, who was appointed to head up the bank in December 2018. Das's support of demonetization is in line with the views of top government officials. He is also expected to better align with India’s government leadership and amicably support better access to credit.

The Reserve Bank of India played a central role in the economies of a number of countries in the region, including Myanmar until 1947 and Pakistan until 1948—about a year after Partition.

The RBI and the Indian Economy

As with all economies, the central bank plays a key role in managing and monitoring the monetary policies affecting both commercial and personal finance as well as the banking system.

The bank affected a demonetization of the Indian rupee (INR) in 2016, removing Rs. 500 and Rs. 1000 notes from circulation, eliminated nearly 86% of its money overnight. The move aimed to stop counterfeiting, hoarding, and terrorism-related activities. Another major motivation was to stop tax evasion in a country where only 1% of citizens reportedly paid income taxes in 2013.

The analysis following this decision shows some wins and losses. The demonetization of the specified currencies caused cash shortages and chaos while also requiring extra spending from the RBI for printing more money. On the other hand, tax collection increased, which resulted from greater consumer reporting transparency.

The central bank must also grapple with a slightly volatile inflation rate. The RBI Act of 1934 requires the bank and the federal government to consult with one another to come up with a suitable inflation target. As of April 2021, the RBI reported a target rate of 4%—the highest level reaching 6% while the lowest hung in around 2%. This target will remain for the five-year period from April 1, 2021, to March 31, 2026.

India's policy repo rate remained steady at 4%. This is the interest rate that the central bank lends money to the nation's commercial banks. The RBI took drastic steps to address the economic and financial issues that resulted from the COVID-19 pandemic. The rate dropped 2% from April 2019, when the bank set it at 6%. Credit rates remained relatively high in India prior to that time, despite the central bank’s positioning, which has been limiting borrowing across the economy.

The RBI banned the use of virtual currencies by the financial agencies and banks that it regulates in 2018.

India’s Growth 

India's economy experienced a significant degree of growth since the early 2000s. According to the World Bank, the country implemented policies to help get more than 90 million people out of poverty between 2011 and 2015.

Despite its rapid growth rate, the Indian economy has weakened—both before and during the global COIVD-19 pandemic hit. A weak financial sector and a drop in private consumption led to a drop in growth from 8.3% to 4% between 2017 and 2020. The World Bank estimated India's GDP to be more than $2.62 billion as of 2020, making it the sixth-largest in the world after the U.S., China, Japan, Germany, and the United Kingdom.

This figure is expected to grow, with the most apparent effect sometime in 2022. The World Bank estimates growth to stabilize around 7% by that point. This will likely be due to a greater concentration on fiscal and monetary policy to help boost struggling individuals and businesses, as well as greater spending on health and welfare—all of which is expected to lessen the blow of the crisis.

GDP Growth and Nominal GDP.

The Bottom Line

As one of the fastest-growing emerging market countries in the world, India has several unique challenges ahead that will require nimble navigation from the RBI, not to mention tackling the coronavirus pandemic that has shaken the world. Shaktikanta Das will be charged with guiding the monetary policy direction for the country as it continues to take the spotlight for GDP growth, which is expected to begin rebounding by 2022.