ABSTRACT
The post-War period saw a slump in the world economy. India turned from a net exporter to a net importer. The price of silver also began to fall precipitously. The rupee exchange rate fixed initially at 2s. gold was reduced to 2s. sterling. But even this could not be sustained with growing current account deficits. It was ultimately allowed to float. This buffered India to an extent at least from the deflationary trend which gripped the world economy in the post war years. But when Britain returned to the gold standard in 1925, it put India back on to a fixed exchange rate regime. The Hilton Young Committee suggested that India adopt a gold exchange standard. But this did not happen; instead India returned to a sterling exchange standard with the rupee pegged at 1s.6d. Many considered that at this rate, the rupee was overvalued. It exports were dwindling even as imports were increasing. The balance of payments deficit could only be covered through export of gold that was actuated on account of the intense depressionary conditions prevailing in the agricultural sector. Meanwhile, in the banking sector there was a realization of India’s need for greater channelization of savings to productive investment and also for a central bank. The Presidency Banks were merged into one entity, the Imperial Bank, which was seen as an important step for the
expansion of banking in India. However, the Imperial Bank was essentially a commercial enterprise and its objectives could not be reconciled to those of a central bank; it was in 1935 that India’s central bank, the Reserve Bank of India, commenced operations.
