RBI@80: The Global ANALYST

RBI@80 : A Celebration With A Difference*
M G Warrier
Writing on Dr Raghuram Rajan, on his appointment as RBI Governor, I had concluded my column (TGA, September, 2013) with the following observation:
“To conclude, I must say, the appointment of Dr Rajan has raised huge expectations. Can the new RBI governor help the economy, besieged by a plethora of challenges including a weakening currency, burgeoning deficits, sluggish growth, runaway inflation, rising interest costs, etc., regain momentum? Well, only time will tell.”
Dr Rajan’s efforts to restore people’s confidence in the Indian financial system have succeeded and there cannot be a better testimony for this than the appreciation showered on RBI and its governor by Prime Minister Modi on April 2, 2015 in Mumbai on the occasion of RBI’s 81st birthday. Appreciating the role played by RBI over the last 80 years, the Prime Minister also complimented the RBI Governor Dr. Raghuram Rajan, for his grasp and clarity on economic issues. While RBI’s professionalism and expertise which has placed the institution on a high pedestal among central banks, the following observation coming from Dr Raghuram Rajan after 20 months stay inside the institution must boost the morale of all RBites(serving and retired). He said:
“The RBI is also respected for its integrity. It is a matter of great pride for me today that when someone enters our building to persuade us to change a regulation, they come armed not with money but with arguments about what is right. Let me conclude. Strong national institutions are hard to build. Therefore existing ones should be nurtured from the outside, and constantly rejuvenated from the inside, for there are precious few of them. In the 81st year of this great institution let us rededicate it to helping the nation secure prosperity and economic opportunity for all.”

Prime Minister's remarks at the inaugural session of RBI Conference on Financial Inclusion
The Prime Minister, Shri Narendra Modi, today urged the Reserve Bank of India to take the lead in encouraging financial institutions to set concrete targets for financial inclusion over the next 20 years, to help transform the quality of life of the poor. "I come as a representative of the poor, underprivileged, marginalized and tribals; I am one among them; I seek on their behalf and trust you will not disappoint me," the Prime Minister said, at the RBI Conference on Financial Inclusion, which also marked the completion of 80 years of the Reserve Bank of India. He encouraged RBI to set goals on intermediate targets: of 2019, when the country will celebrate the 150th anniversary of Mahatma Gandhi; 2022, 75 years of independence; 2025, 90 years of RBI, and 2035, 100 years of RBI. The Prime Minister said the success of the Pradhan Mantri Jan Dhan Yojana and the Direct Benefit Transfer of LPG subsidy, had shown the potential of the enormous role that the banking sector can play in ensuring financial inclusion. The Prime Minister called for making financial inclusion a "habit." He asked banks to take inspiration from the success of women self-help groups. He asked banks to keep in mind the requirement of youth who needed either knowledge or skills. He also gave the example of the soon-to-be-launched MUDRA initiative in this regard. He urged banks to come up with creative financial inclusion instruments to help prevent farmer suicides. The Prime Minister said that along with economic and social parameters, there is need to think of a geographical parameter as well for financial inclusion. He said eastern India had immense economic potential, and the banking sector should recognize and plan for this. Appreciating the role played by RBI over the last 80 years, the Prime Minister complimented the RBI Governor Dr. Raghuram Rajan, for his grasp and clarity on economic issues. As part of the Make in India initiative, the Prime Minister urged RBI to take the lead in ensuring that India starts to manufacture the paper and ink that are used to print currency notes. Speaking on the occasion the Finance Minister, Mr. Arun Jaitley lauded the RBI’s role in management of country’s monitory policy, inflation management, regulation of banking system and management of public debt. Talking about the Financial Inclusion the Minister said Prime Minister’s Jan Dhan Yojana was a tremendous success and said the next phase of the challenge was to provide the certain amount of social security to the holders of these accounts in terms of accident and life insurance and an alterative pension system for the under privileged sections with the support of public exchequer, banking system and other institutions. He said, the banking system and the RBI as a regulator of the system will have an important role in all these developments.


RBI celebrates its 80th Anniversary - Opening remarks by Dr. Raghuram G. Rajan, Governor, Reserve Bank of India at the Financial Inclusion Conference, April 2, 2015 आदरणीय प्रधान मंत्री श्री नरेंद्र मोदी जी, महाराष्ट्र गवननर श्री ववद्यासाग्गर जी, ववत्त मंत्री श्री अरुण जैटली जी, मुख्य मंत्री श्री देवेंद्र फड्नवीस, अन्य ववविष्ट अविविगण, मेरे RBI के सावियों, देववयों और सज्जनों। आज भारिीय ररज़वन बैंक ने अस्सी वर्न पूरे कर वलए हैं। आदमी के जीवन में अस्सी वर्न काफी लंबा समय होिा है। दविण भारि में अस्सी वर्न पूरे करने पर सदावभर्ेकम नाम से एक समारोह मनाया जािा है। िो एक िरह से आज हम भारिीय ररज़वन बैंक का सदावभर्ेकम मना रहें है। लेककन इसका मिलब यह नहीं है की अब ररजवन बैंक की वजम्मेदाररयााँ समाप्त हो गईं हैं, आज िो के वल हमारे सफर के िूरूआि की समाप्ती है। The Reserve Bank was set up in 1935 when India was under British rule. But the RBI was certainly not a British institution, and has been working right from the outset for Indian economic interests. It has also nurtured Indian talent. In 1943, Chintaman Dwarkanath Deshmukh, one of India’s finest financial minds, was appointed as the first Indian governor of the Reserve Bank. Amongst the problems he had to confront was how to deal respectfully but firmly with the debts the colonial power had accumulated to India during World War II. Over the years, the Reserve Bank has been blessed with a number of such great leaders, a reflection also of the importance the government places in having a strong central bank. The list of past governors and deputy governors reads like a who’s who of the Indian economic establishment, with governors like Benegal Rama Rau, M. Narasimham, Dr. I.G. Patel, Dr. Manmohan Singh, Dr. Rangarajan, Dr. Bimal Jalan, Dr. Y.V. Reddy, and Dr. Subba Rao, ably assisted by deputy governors such as SS Tarapore, Vepa Kamesan, Dr. Rakesh Mohan, K. Udeshi, Shyamala Gopinath, and Usha Thorat. The RBI’s board has also been superb, with people like Sir Purshottamdas Thakurdas and Yezdi Malegam guiding it. Interestingly, many of the governors were from the administrative services, with only one, M. Narasimham, from the RBI itself. Nevertheless, all understood that the Reserve Bank’s role is to safeguard the monetary and financial stability of the country even while working towards its financial development. There has always been a constructive dialogue between the Government and the Bank, informed by their respective time horizons and attitudes towards risk. And history records that successive governments have invariably appreciated the wisdom of the Reserve Bank’s counsel. Over the years, the Reserve Bank has had addressed many concerns. Inflation control has been foremost – and the Reserve Bank has done an admirable job over time, despite the price pressures created by food shortages, oil prices and wars. Financial sector development has been another concern. The RBI’s role has included setting up new institutions, encouraging the use of technology, developing markets, and expanding financial inclusion. In the coming year, we will have many new players in the banking ecosystem, such as payments banks, small finance banks and possibly a postal bank competing with existing universal banks, regional rural banks, cooperative banks, and a variety of non-bank finance companies. The use of technology has also expanded from the days when accounts were maintained manually in ledgers and unions called for strikes at the very mention of the word computers. Today, some banks allow customers to do all their banking transactions on a mobile phone, without entering a branch or touching a pen. The Reserve Bank's intent is to create an ownership neutral, institution neutral, technology agnostic level competitive arena. For example, technologies 3 enabling touch-and-go payments will find use even as banks focus on acquiring and analysing information and reducing transactions costs as they compete to extend financial services to all. The RBI’s state-of-the-art payments system will support technology, even as the RBI strengthens its cyber-supervision and cyber-security. We also need deep markets to absorb risks that stay too often in banks or in corporations. Here too our track record has been strong. Though many developing country governments are forced to borrow only in foreign currency, the Reserve Bank has fostered a liquid rupee government bond market, where the government today is able to contemplate issuing 40 year bonds. The rupee is truly becoming international as foreign institutions queue up to issue rupee denominated bonds. New products supported by the RBI, such as the recently introduced interest rate futures contract, are doing a roaring business on exchanges. Our tasks are far from over. The nation has enormous financing needs in infrastructure, and far too many of our banks already have too much exposure. Big corporate infrastructure players have also taken too much debt. The required national push to finance infrastructure should not override financial stability, which is key to national security. Going forward, we need to develop new sources of risk capital so that our infrastructure needs can be financed with moderate amount of debt, even as we help the system deleveragem. Perhaps the country’s most important financial challenge, which is the theme of the Conference today, is to bring financial services to every doorstep and to every small enterprise. The poor are still too far away from, or too uncomfortable stepping into, bank branches. With government initiatives like Pradhan Mantri Jan Dhan Yojana and the MUDRA Bank, as well as new technologies, new institutions, and new processes such as direct benefits transfers, I am confident that our country can empower the poor and the small with both choice and opportunities. The Reserve Bank in turn has to ensure greater consumer protection and consumer literacy. Finally, if the Reserve Bank is respected today, it is because of the many thousands who have worked over the years for the Bank, with capability and dedication. Let me recognize two. Rani Durve, a DGM in the Bhopal office, has created numerous films, books, and street plays on themes such as fictitious emails and excessive interest rates so as to educate and inform the public. Nirmal Pattnayak, an AGM in the Department of Information Technology, enabled the pan-India electronic transfer of funds for government departments through the national electronic payment systems, thus overnight making the government one of the largest users of electronic payments. Both have gone beyond the ordinary call of duty, but they are only representative of many others in the Bank. The RBI is also respected for its integrity. It is a matter of great pride for me today that when someone enters our building to persuade us to change a regulation, they come armed not with money but with arguments about what is right. Let me conclude. Strong national institutions are hard to build. Therefore existing ones should be nurtured from the outside, and constantly rejuvenated from the inside, for there are precious few of them. In the 81st year of this great institution let us rededicate it to helping the nation secure prosperity and economic opportunity for all. Thank you for joining us in this celebration. ** Related Links Prime Minister urges Banking Fraternity to set Goals for Next 20 Years to remove India's Poverty Prime Minister's remarks Prime Minister's remarks full text in Hindi Video recording of inaugural function of RBI celebrating completion of its 80th year

Having commenced functioning on April 1, 1935, Reserve Bank of India is celebrating its 81st birthday on April 1, 2015. If one goes by the messages exchanged between the then Secretary of State for India and the Reserve bank of India Governor on the occasion of the inauguration of the Bank, looking back, the institution can be proud about having met the role expectations excellently well. To quote from the History of the Reserve Bank of India(Volume I):
“On the occasion of the inauguration of the Bank, the Secretary of State for India sent the following message to the Governor:
As Reserve Bank commences active operations today I take opportunity to convey to you and your colleagues on the Board my most cordial good wishes and to express my confidence that this great undertaking  will contribute largely to the economic well-being of India and of its people.
Replying on behalf of the Deputy Governors, the Board and himself, the Governor assured the Secretary of State,
That their utmost endeavour will be to promote the economic well-being of India and thereby completely justify the institution of the Reserve bank of India”
It cannot be just coincidental, that while interacting with media on march 22, 2015 after addressing the 550th     Central Board Meeting of the Reserve bank of India, Finance Minister Arun jaitley sought to dispel any talk of rift with RBI. He said: “There has always been and will continue to be a regular interaction between the Reserve bank and the government…We have complete free and frank discussions, and therefore, there is no question of any disconnect. I have repeatedly clarified that.” This reassurance, coming in the context of the Union Budget 2015-16, which contains certain announcements aimed at redefining the traditional relationship between GOI and RBI, need  to be taken in the right spirit and welcomed.
The views expressed by RBI Governor Dr Raghuram Rajan about debt management, fiscal deficit and the measures to be initiated by central and state governments to improve environment to support economic development, should be seen in this context. A reading together of the views of the Finance Minister and the RBI Governor gives one the comfort that the harmony in approach of GOI and RBI which existed in the initial days of RBI’s functioning has been preserved and, definitely ‘rift’ is not the word to be used for explaining differences in views which are being discussed and settled from time to time.
There cannot be two views about the need for changes in institutional structure and procedures. Fortunately, like the Indian Railways, GOI and RBI have also taken up modernisation seriously.
As the institution grows, the relevance of comprehensive changes in the Reserve Bank of India Act, 1934 will be felt more and more. This had been foreseen by the writers of the Act who included the following clauses in the Preamble of the Act:
“And Whereas in the present disorganisation of the monetary systems of the worldit is not possible to determine what is suitable as a permanent basis for the Indian monetary system;
But Whereas it is expedient to make temporary provision on the basis of the existing monetary system, and to leave the question of the monetary standard best  suited to India to be considered when the international monetary position has become sufficiently clear and stable to make it possible to frame permanent measures;”
A god-sent opportunity for such a review was ignored by the Financial sector Legislative Reforms Commission(FSLRC) which opted to re-invent structures and legislative instruments to help out a government from embarrassment caused by a weak finance ministry(not weak Finance Minister) not equipped to argue its cases sensibly with statutory bodies and corporates.  
For several reasons, it would be expedient to preserve the present structure and role of RBI. More so, because, Reserve Bank of India has from time to time played proactive role in institution-building in the financial sector and as an organisation it has always upheld national interest.
(M G Warrier is former general manager, RBI, Mumbai and author of 2014 book “Banking, Reforms & Corruption: Development Issues in 21st Century”)
*A slightly edited version of this article was published in The Global ANALYST, May 2015


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