The history of currency usage in India dates back to the ancient Vedic period. The later period was an era of standardised metal coins. In “Arthsatra” by Chanakya, we can notice references to various coins like Suvarnarupa or gold coins, Rupayarupa or silver coins, Tamararupa or copper coins, and Sisarupa or lead coins. However, during British rule, an organised modern central banking system started which later developed into Reserve Bank of India.

The British East India Company established three presidencies, and later, the presidencies towns of Bombay, Madras, and Calcutta grew into their significant base and trading post.

In 1836, a group of traders and merchants submitted a scheme to establish a central bank. The main idea behind their suggestion was to achieve monetary stability.

In the meantime, three presidency banks were established by the royal charter. Those days, they were limited liability joint stock companies.

ORIGIN OF RESERVE BANK OF INDIA.

The initial stage of central banking started with three presidency banks. The Bank of Calcutta, a significant milestone in India’s banking history, was established on June 2, 1806. It was later rechristened as the Bank of Bengal on January 2, 1809. The Bank of Bombay, another key institution, was established on April 15, 1840, and on July 1, 1843, the Bank of Madras was established.

The idea for an All-India Central Bank was shelved due to the establishment of three presidential banks.

These presidency banks had the right to issue paper currency along with some selected banks and their right to print currency continued till 1861.

When the Paper Currency Act of 1861 passed, the government of India got the sole right to issue bank notes.

CHAMBERLAIN COMMISSION AND J.M. KEYNES OBSERVATION.

Chamberlain Commission was appointed to inquire into the location and management of general balances of the government of British India, the sale of Council Bills and Transfers, the measures taken by the secretary of state for India to maintain the exchange value of the rupee in pursuance of or supplementary to the recommendations of the Indian currency committee of 1898 and employment of gold standard and paper currency.

The commission, under the chairmanship of Austen Chamberlain, suggested abandoning the idea of a gold standard based on a gold currency. They also examined the possibility of a state-owned central bank for India. J.M. Keynes (Lord Keynes), a committee member, insisted on creating a central banking agency in India.

The commission also penned the details of the functions of the proposed reserve bank.

HILTON YOUNG COMMISSION OR THE ROYAL COMMISSION ON INDIAN CURRENCY, FINANCE.

Hilton Young Commission of 1926 suggested creating a new central bank and stressed the need to separate the control of monetary affairs from fiscal affairs. This commission also pointed out the need to develop the banking sector in India. This commission also pointed out the need to develop the banking sector in India.

Apart from the above two, the commission also made some other observations.

1. The central bank could be formed as a shareholders’ bank.
2. Even though it was created as a shareholders’ bank, it should act in close collaboration with the government.
3. The commission opposed the idea of a state-controlled one because the members believed that a state-controlled bank might become a puppet in the hands of its political masters.
4. Due to the diversity of India, they proposed the American Federal Reserve System instead of the British Unitary System.
5. They also proposed a local and central board with an elected majority (members elected by the shareholders).

A bill was later introduced in the legislature in 1927. The plan was to give effect to the Hilton Commission recommendation. However, due to opposition, the bill was referred to a select committee to check some of its features like.

1. Private nature of the bank.
2. Exclusion of legislature members from its directorate.

Later, a new bill was introduced but withdrawn in 1928 due to controversy. Simon Commission and Round Table conferences also favoured a central bank.

THE RESERVE BANK OF INDIA ACT OF 1934.

The white paper on Indian constitutional reforms in 1933 recommended the formation of a central bank. Later, in July 1933, a committee of 23 members met in London under the chairmanship of the secretary of state to draft the Reserve Bank of India bill.

The bill was introduced in the legislature in September 1933 and became law on March 8, 1934. The Imperial Bank Act of 1920 was also amended to ensure the smooth functioning of the central bank.

According to the act, the central bank’s primary objective is to regulate the issue of bank notes, keep reserves to secure monetary stability, operate the currency and credit system, and maintain price stability with economic growth.

The Bank Act received the governor general’s assent and formally began its operations at Kolkatta (Calcutta) on April 1, 1935.

THE STRUCTURE

It was established as a private shareholder bank with five crore rupees in capital, divided into shares of 100 rupees each fully paid up. 95.56 per cent of the shares were privately held, and 0.44 per cent were with the central government. The aggregate shares were allotted on the basis of the relative importance of areas- Bombay, Calcutta, Delhi, Madras and Rangoon ( Later Burma was separated from RBI’s control). The bank had offices in these five locations, and general guidance was entrusted to the Central board of directors, consisting of 16 members, and the local board, consisting of 8 members. These local boards had advisory functions. Sir Osborne Smith the first Governor of the Bank.

It is modelled like the Bank of England, but there were differences. Montagu Norman, the Governor of the Bank of England (1920 to 1944), compared the relationship of the Bank of England and the Reserve Bank of India with “Hindu Marriage”. According to him, the Reserve Bank of India was to yield to the Bank of England in return for formal advisory services and the right to determine the disposition of its funds and generally cooperate with it in matters affecting the good management of the sterling.

THE LINE OF BUSINESS ACCORDING TO THE RESERVE BANK OF INDIA ACT 1933.

1. The bank is empowered to sell, buy and rediscount bills of exchange and promissory notes, Maturing within 90 days, and agricultural bills maturing within nine months.
2. Can provide loans and advances to states in India, Local authorities, scheduled banks and provisional cooperative banks repaying on demand or on the expiry of fixed periods not exceeding 90 days against stock, securities, gold, silver and promissory notes.
3. The Reserve Bank can make ways and means advances to the central government or local governments repayable within 90 days.
4. Can purchase and sell government securities ( Both British and Indian).
5. May purchase or sell securities of a local government under certain conditions.
6. The Reserve Bank of India is authorised to borrow money for a period not exceeding one month from scheduled banks or other central banks.
7. The bank is prohibited from competing with ordinary banks.
8. The central bank may act as a government’s banker. The bank accepts money and makes payments on behalf of the government, carrying out their exchange remittances.
9. The bank has a monopoly on note-issue in the country. Before the RBI Act of 1934, the government was the note-issuing authority. RBI created a note issue department for issuing currency, and the bank took over all the gold held in the gold standard and paper currency reserves. The RBI Act 1934 prescribed the proportional reserve system. The government of India guarantees the notes, and the first note was issued in 1938.
10. RBI had an agricultural credit department. This was a unique feature.

Reserve Bank of India after 1947.

With the passage of the Reserve Bank (Transfer to Public Ownership) Act of 1948) the Reserve Bank was nationalised on January 1, 1949. Meanwhile, nationalising compensation has been paid to the private shareholders. Sir C. D. Deshmukh assumed the office of Governor (1943) and became the first Indian to reach that post. He continued in that post till nationalisation. After independence, RBI continued its job for India, while the State Bank of Pakistan (established by the State Bank of Pakistan Order 1948) took over Pakistan’s monetary policy responsibility. Reserve Bank of India maintained a London office from 1935 onwards, and this office was closed on September 30, 1963.