Monetary Policy

• The monetary policy during British India evolved from a fragmented system of coinage and local currencies into a centralized system primarily designed to serve colonial economic and political interests.

• The primary objectives of British India’s monetary policy were exchange rate stability, facilitation of colonial trade, generation of revenue, and control of inflation only to the extent that it affected imperial goals, not economic development.

• In the early 19th century, India had no uniform currency system; various regions used silver and copper coins minted by local authorities and native states.

• The British East India Company gradually established a monetary uniformity, culminating in the Coinage Act of 1835, which introduced a uniform silver rupee throughout British territories in India.

• The 1835 Act made the silver rupee (11.66 grams of silver) the standard currency, with the face of the British monarch on one side and a denomination in Persian and English on the other.

• British India’s monetary system initially operated on a silver standard, as India had abundant silver reserves and silver was traditionally the monetary metal of choice in Asia.

• The gold standard, popular in Europe, was resisted in India in the 19th century due to the dominance of silver in domestic and international trade within Asia.

• From 1873 onwards, a global decline in silver prices (due to increased production in the Americas and demonetization in Western countries) caused severe monetary instability in India.

• The fall in silver prices resulted in a decline in the external value of the rupee, adversely affecting India’s ability to pay “Home Charges”—the remittances made by India to Britain to cover administrative and military costs.

• To arrest this depreciation, a monetary reform committee was established in 1893 (Herschell Committee), recommending the closure of mints to free coinage of silver, ending India’s full silver standard.

• Following the committee’s recommendations, India adopted a gold exchange standard in 1898: the rupee was now pegged to gold indirectly via the British pound sterling at the rate of 1 rupee = 1 shilling 4 pence.

• Under the gold exchange standard, India did not circulate gold coins domestically, but maintained exchange rates with Britain using gold reserves abroad.

• The Currency Act of 1899 and Indian Coinage and Paper Currency Act of 1899 formalized the gold-exchange standard and established the Indian rupee as a token currency.

• The colonial government controlled currency issuance, and the Rupee was declared legal tender, backed not by gold in India but by gold and sterling balances held in London.

• Paper currency was introduced through the Paper Currency Act of 1861, which gave the British colonial government monopoly over paper note issuance in India.

• Under this act, three Presidency Banks (Bombay, Calcutta, Madras) ceased note issuance, and the Government of India began issuing notes in various denominations.

• In 1861, the first official Government of India notes were issued under the authority of the Secretary of State for India in Council.

• Paper currency was initially backed by a Currency Reserve Fund, consisting of gold, silver, and government securities, and managed by the Controller of Currency.

• There was no central bank in India during most of the colonial period, and monetary policy was administered by the Finance Department and Currency Department of the Government of India.

• The exchange rate policy was designed to benefit Britain—maintaining a stable rupee-sterling rate facilitated British trade and Home Charges remittance.

• During World War I, India experienced high inflation due to increased money supply, deficit financing, and disruptions in trade.

• The war also led to a shortage of silver, causing the price of silver to rise above the face value of rupee coins, resulting in hoarding and melting of silver coins.

• To counter the crisis, token coins (cupro-nickel) and smaller denomination paper notes were introduced temporarily.

• In 1920, the Chamberlain Commission recommended the adoption of a gold bullion standard (not coin-based), but this was not fully implemented due to global economic instability.

• The Rupee was revalued in 1920 from 1 shilling 4 pence to 2 shillings, appreciating the rupee to maintain confidence in Indian currency and check inflation.

• The Reserve Bank of India (RBI) was established in 1935 under the RBI Act of 1934 as the central bank of India, with powers to issue currency and regulate credit.

• RBI was set up as a shareholder-owned private institution, headquartered in Calcutta (later moved to Mumbai), and it became the official monetary authority.

• The RBI took over currency management from the Controller of Currency in 1935, and note issuance continued under strict legal backing until full fiduciary issuance began in later decades.

• RBI functioned as the banker to the government, custodian of foreign exchange, and lender of last resort, but its policies remained aligned with British interests.

• During World War II, monetary policy was dominated by deficit financing, as Britain borrowed extensively from India to fund the war.

• The printing of currency increased dramatically, and the money supply grew by over 5 times between 1939 and 1945, leading to severe inflation.

• The British government created “Sterling Balances”—accounts held by the Government of India in Britain—to which wartime expenditures were credited instead of actual gold transfers.

• By 1945, India had accumulated over ₹1,700 crore in Sterling Balances, but could not freely use this money, as it was controlled by the British Treasury.

• The monetary expansion during WWII led to inflation, scarcity of consumer goods, and emergence of black markets across the country.

• The RBI remained under British control until January 1, 1949, even after independence in 1947, when it was nationalized by the Government of India.

• Until independence, monetary policy decisions were dictated by British political and imperial priorities, not by Indian developmental or social welfare objectives.

• Credit policy under colonial rule was minimal and conservative—no proactive role was played in credit creation for agriculture or Indian industry.

• Indian banks and credit cooperatives were underdeveloped, and rural credit largely remained in the hands of moneylenders and zamindars, due to absence of institutional monetary policy for rural areas.

• The colonial monetary regime emphasized exchange stability over employment generation or price stability, reflecting its function as a colonial tool.

• Throughout British rule, India remained a net contributor to the British economy, and monetary policy helped facilitate the “Drain of Wealth” from India to Britain.