Thursday , May 28 2020

RBI turns 85!

Summary:
Starting on April 1 (Fool’s day!) 1935, RBI completes 85 years today. Aunindyo Chakravarty has a piece on the anniversary in the Quint: During the First World War, India spent more than 8 per cent of its GDP to finance Britain’s war effort. About half of that money went as direct cash contribution, a fifth went in low-interest loans and the remaining went in kind. This massive drain should have caused inflation, raised interest rates and weakened the rupee. But, the British Empire managed it through price controls, interest rate ceilings and by not letting the rupee-pound exchange rate budge, till the war was over. This was fine as long as British officials in India were gaining as well. But, after the war ended, the Rupee was allowed to weaken and that meant the money officials of

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Starting on April 1 (Fool’s day!) 1935, RBI completes 85 years today.

Aunindyo Chakravarty has a piece on the anniversary in the Quint:

During the First World War, India spent more than 8 per cent of its GDP to finance Britain’s war effort. About half of that money went as direct cash contribution, a fifth went in low-interest loans and the remaining went in kind. This massive drain should have caused inflation, raised interest rates and weakened the rupee. But, the British Empire managed it through price controls, interest rate ceilings and by not letting the rupee-pound exchange rate budge, till the war was over.

This was fine as long as British officials in India were gaining as well. But, after the war ended, the Rupee was allowed to weaken and that meant the money officials of the Raj earned in India converted into fewer Pounds when they sent it home. This trouble with ‘remittances’ was one key reason why the Viceroys’ officers in India began sparring over financial independence with the India Office in London.

This stand-off between two sides of the coin of the British ruling establishment, ended up in a peculiar truce – the founding of the Reserve Bank of India on All Fool’s Day in 1935. The RBI accorded some semblance of financial autonomy to the officials of the British Raj on the ground, but it also ensured that the ‘London market’ would continue to control it.

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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