The Increasing Importance of the Reserve Bank of India

India is one of the fastest-growing economies in the world, reporting some of the best gross domestic product (GDP) growth rates in the world. It is also one of the five most powerful emerging market countries. This group, which includes Brazil, Russia, China, and South Africa, are collectively known as the BRICS nations. The country's monetary and fiscal policies are the responsibility of the country's central bank, the Reserve Bank of India (RBI). Headquartered in India's finance capital, Mumbai, the bank had over $818.33 billion in assets.

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 RBI 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's focus shifted, 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. His 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 (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.

Demonetizing the Rupee

The bank affected a demonetization of the Indian rupee (INR) in 2016, removing Rs. 500 and Rs. 1000 notes from circulation, eliminating nearly 86% of its money overnight. The move aimed to stop counterfeiting, hoarding, terrorism-related activities, and 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 to print more money. On the other hand, tax collection increased, which resulted from greater consumer reporting transparency.

Controlling Inflation

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.

India’s Economic 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 COVID-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 2016 and 2019. The country's economy experienced negative growth in 2020, hitting.

The World Bank estimated India's GDP to be more than $3.39 trillion as of 2022, making it the fifth-largest in the world after the U.S., China, Japan, and Germany. Real GDP will hover around 6.3% during the 2023-2024 fiscal year, which is a moderate drop from the 6.9% reported during 2022-2023.

According to the World Bank, growth will stabilize around 7%. 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 are expected to lessen the blow of the crisis.

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.