NEW YORK WEATHER

While the entire Indian economy was disrupted by the demonetisation exercise announced on November 8, 2016, removing high-value currency notes overnight, it simultaneously stirred a serious controversy on the role of Reserve Bank of India as the principal regulator of money supply in India.

In understanding the controversial conduct of the Reserve Bank of India, a deeper study of the evolution of the central bank as the regulator of money supply is necessary.

Historically, the colonial government assumed sole note-issuing powers in 1861 with the enactment of the Paper Currency Act. That power was later delegated to the Presidency Banks. With their merger to form the Imperial Bank of India in 1921, the responsibility for issuing currency was shifted to the Imperial Bank (which is now State Bank of India). With the passage of the Reserve Bank of India Act in 1934, this power was transferred the next year to the newly established Reserve Bank of India.

This took place against the backdrop of the US Congress passing the the Federal Reserve Act in 1913, giving the Federal Reserve Board the power of currency management after the financial crisis known as “The Panic of 1907”.

What is the rationale of the Indian system? What George Schuster,…

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