16-06-2012, 11:29 AM
Financial Sector Reforms and Role of RBI
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It is indeed a rare privilege to address this constellation of
officers from the Indian defence and civil services and defence
forces from across the world. This is my first visit to NDC and it is
sort of a pilgrimage for me to get the opportunity to touch base
here. NDC is one of the major legacies of the Nehruvian era and
unlike some of the other legacies of that period, this institution has
consistently lived up to its larger than life image. NDC, in its
training programme, provides the framework for the confluence of a
truly interdisciplinary approach and exchange of views among the
career defence personnel from across the world and Indian civil
servants. Through this process NDC has made distinct contributions
on numerous aspects of the contemporary Indian history ranging
from strategic thinking to global understanding.
Overview of the Financial Sector
Since today’s lecture is anchored around the role of RBI in
financial sector reforms, my focus would mainly be on those
segments of the financial sector, which are under the purview of the
RBI. In order to initiate today’s discussion, I would initially present
an overview of the financial sector. Then, talk about the broad
issues about the role of financial sector and identify its various
components and from that I would analyse the relative importance
of the various institutions in the Indian financial sector.
Role of Financial Sector
A major function of the financial sector is to provide the
framework for management of cash flow situation of different
economic units such as individuals, corporates, government
agencies, etc. In simple words, the income and expenditure pattern
of individual economic units may not match at every point of time.
Financial sector helps bridging such gaps. In the process, the sector
reallocates financial resources between deficit and surplus entities.
Financial sector also facilitates management of various types of
risks. For example, an economic unit may like to deploy its surplus
fund for a short period of time and another economic unit may want
to access funds for a longer period.
Rationale for Financial Sector Reform
Having identified the major components of the Indian financial
sector in terms of institutional structure, it is now time to turn our
attention to the financial sector reform process, which has been
initiated in the country during the early 1990s. The basic question
that arises here is, why reforms? Naturally to give the answer to
this question one needs to know what were the conditions under
which these changes were introduced.
Just to recap, post-independence India adopted a planned
economic development strategy with the aim of the public sector
reaching the "commanding heights". It was argued that a
predominantly privately owned banking structure would not be able
to channelise resources according to plan priorities. In order to align
the planned development of the real economy a policy of “Social
Banking” was adopted and a series of measures were adopted
towards this end.
Role of RBI in the Management of Financial Sector
Having talked about financial sector and the ongoing reform
process in the sector, let us now turn our attention to what exact
role RBI is playing for the financial sector in general and the
financial reform process in particular. As all of you know, RBI is the
central bank of the country. Central banks are very old institutions.
The Bank of England was set up way back in 1694, the Bank of
France is more than 200 years old and the Federal Reserve Bank
was set up in 1913. As aptly stated by our Governor, Dr. Bimal
Jalan, although RBI, set up in 1935, may appear a ‘toddler or at
most a young adult’, it is one of the oldest central banks among the
developing world. Traditionally, central banks have performed roles
of currency authority, banker to the Government and banks, lender
of last resort, supervisor of banks and exchange control (now it
would be more appropriate to call it exchange management)
authority.