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RBI Role in 1991 crisis UPSC NOTE

 Why in news 

  • S.Venkitaramanan, an IAS officer who served as the Governor of the RBI from December 1990 to December 1992 passed away recently

  • Two events in which he had participated are worth recording. 

  • Both show him as a statesman who did his best for his country, for which he deserves to be remembered.

S. Venkitaramanan

  • S. Venkitaramanan had a pivotal role in steering India through the financial crisis by employing strategies like pledging gold reserves and implementing,

import compression, stabilising the country’s balance of payments, but despite the efforts, his legacy was overshadowed by subsequent economic reforms.

  • Venkitaramanan led RBI’s efforts during India’s severe balance of payments stress in 1990-91.

  • This includes initiatives to raise international loans and pledging India’s gold reserves, which salvaged the country’s financial reputation and prevented a potential default.

  • Under his leadership, RBI implemented import compression measures by raising cash margins on imports. 

  • This stringent strategy significantly reduced the current account deficit, stabilising the balance of payments.

  • He also displayed openness by inviting diverse opinions and experts, including critical voices, to discuss critical economic matters, demonstrating an inclusive and non-hierarchical approach to decision-making.

Two significant events during Venkitaramanan's tenure.

  • Starting in late 1990, India faced a severe balance of payments stress. 

  • This had been precipitated by a slowing of inward remittances and a rise in the price of oil following the invasion of Kuwait by Saddam Hussain. 

  • The current account of the balance of payments was subjected to a double whammy.

  • A reduction of receipts and a rise in the value of imports

  • In 1990-91 the current account deficit swelled to 3 percent of the GDP, a level highest by far in two decades. 

  • There was speculation that India would default on its external payment obligations

  • It was at that moment that the RBI led by Mr. Venkitaramanan played a sterling role, which in effect came to pledging its gold to international banks for a hard currency loan

  • The details of these initiatives and their significance are set out in the RBI’s official history,

  • In April 1991, the Government raised $200.0 million from the Union Bank of Switzerland .

  • Again, in July 1991, India shipped 47 tonnes of gold to the Bank of England to raise another $405.0 million. 

  • This action helped the country repay its international donors and creditors.

Secondly

  • Before its efforts to raise international loans, the RBI had begun a programme of import compression, implemented mainly via raising the cash margin on imports

  • While this had commenced before Mr. Venkitaramanan had assumed office as Governor,

  • The cash margin was hiked four-fold between October 1990 and April 1991

  • Supplementary measures that raised the cost of imports were implemented too, together constituting a stringent effort to rein them in.

  • This strategy turned out to be a winner, and the current account deficit flipped from a high of 3 percent in 1990-91 to a mere .

  • 3 percent of GDP in 1991-92. 

  • This almost eliminated the need to raise foreign exchange to finance India’s non-debt payments.

  • Though a government led by Narasimha Rao was to take office in mid-1991 and set in motion

measures, including a devaluation of the rupee, to improve the balance of payments over the long term there is reason to believe that the immediate improvement of the balance of payments may be largely attributed to the import compression put in place by the RBI. 

  • This is implied by the data, which show that while imports contracted substantially in 1991-92 exports did not rise.

  •  The RBI’s official history of the period states “At a critical time and in the thick of the BoP crisis, the main task of the Reserve Bank under the leadership of the Governor Venkitaramanan, turned out to navigate the country through the troubled waters.” 

    • It concludes that the crisis was “successfully resolved”. 

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Learnerz IAS | Concept oriented UPSC Classes in Malayalam: RBI Role in 1991 crisis UPSC NOTE
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