Mumbai: Nothing has changed in the relationship between India’s central bank and the government since the inception of the Reserve Bank of India (RBI) in 1935, if the historical documents and news reports exhibited by RBI at its Mumbai office are anything to go by.
The issues that created tussles between RBI and the finance ministry include nationalization of the central bank and major commercial banks in the country, the bank rate, and management of RBI’s investments.
These are highlighted at the RBI exhibition, where most documents are sourced from newspapers. RBI has been hosting such shows across India to educate the public about its history and increase transparency in its functioning. Former RBI deputy governor Usha Thorat inaugurated the exhibition in Mumbai.
Documenting the past: RBI’s first central board of directors, with governor Osborne Smith and deputy governor James B. Taylor (front row, fourth and third from left, respectively). Photo RBI.
The turbulence at the top began in 1936-37, shortly after the central bank became operational, between then governor Osborne Smith and deputy governor James B. Taylor, who had the backing of finance member of the Viceroy’s Council, James Grigg. The differences were on two critical issues—RBI’s autonomy and the monetary policy stand on controlling inflation vis-à-vis fiscal policy. Even today, RBI and the finance ministry have differences on such issues.
The “turbulence” between Smith and his deputy—“two men with a strong and pugnacious personality” or “temperamental incompatibility”—according to former governor Chintaman Deshmukh, led to the governor’s resignation.
Even today, the debate on many of these issues, notably the central bank’s autonomy, monetary policy stance on fighting inflation and deficit financing, continue to strain the relationship between RBI and the government, even though senior central bankers prefer to dub them as “creative tensions”.
Former RBI deputy governor S.S Tarapore, who joined as a research officer in 1961, said the differences between the first RBI governor and the then finance member of the Viceroy’s Council was the most acrimonious in RBI’s history.
“The English didn’t trust Osborne because he was Australian and not from the British civil services. They doubted him because he was considered to be close to the Indian nationalists. He became governor just because he had the support of the then Bank of England governor, Montagu Norman,” Tarapore said. Norman was Bank of England governor between 1920 and 1944.
According to Tarapore, change is a natural process in the central bank, especially because the complexities the economy is facing have increased over time.
“When I joined RBI in 1961, M3 was just Rs 3,000 crore and a Rs 1 crore loan was considered to be huge. Now, a Rs 1 crore loan is given out by individual bank branches daily,” he said. M3 is the broadest definition of money supply. RBI numbers show M3 in the banking system is currently at Rs 70.13 trillion.
The exhibition has not not only attempted to chronicle the evolution of central banking, but also the nation’s history. For instance, it features events of currency notes being used as a means of propaganda against the British in 1942, with protestors defacing notes with slogans such as “Down with the Union Jack” and “Quit India”.
The government soon passed the Legal Tender (Inscribed Notes) Ordinance that made such defaced notes with political propaganda illegal with immediate effect.
One of the earlier hiccups or early-stage challenges RBI had to face was handling the failure of the Travancore National and Quilon Bank in the Travancore region and this highlighted the need to strengthen the regulatory framework of banking institutions.
Another interesting moment in Indian banking history—the nationalization of 14 major banks by then Prime Minister Indira Gandhi—was front page news in The Hindu on 26 July 1969 along with another news item of Apollo 11 being placed in lunar orbit.
RBI, the banker for banks and the government, was nationalized in 1946, after nationalization of the Bank of England. This was immediately followed by a reconstitution of its central and state boards.
The public appearances of top central bank executives, which are keenly watched and scrutinized by the media today, was not a big event in the old days—probably a reason that prompted R.K. Hazari, a deputy governor between 1969 and 1977 to light a cigar even when presiding at one of the conferences of RBI staff to discuss the Tandon committee report on bank loan norms. A young Thorat is also seen in the photograph.
The exhibition also depicts the evolution of Indian currency. RBI issued Rs 5 notes in January 1938, followed by Rs 10 in February, Rs 100 in March, and Rs 1,000 and Rs 10,000 in June that year.
The first note issued by the Indian central bank carried the portrait of George VI and the signature of the second governor, Taylor. A note with a design of Edward VIII was never issued after signed by then governor Smith as the design had to be changed following his abdication.