Question

Why did RBI have to change its role from controller to facilitator of financial sector in India?

Answer 1

1. Prior to liberalisation, RBI used to regulate and control the financial sector that includes financial institutions like commercial banks, investment banks, stock exchange operations and foreign exchange market.
2. With the economic liberalisation and financial sector reforms, RBI needed to shift its role from a controller to facilitator of the financial sector.
3. This implies that the financial organisations were free to make their own decisions on many matters without consulting the RBI.
4. This opened up the gates of financial sectors for the private players.
5. The main objective behind the financial reforms was to encourage private sector participation, increase competition and allowing market forces to operate in the financial sector.
6. Thus, it can be said that before liberalisation, RBI was controlling the financial sector operations whereas in the post-liberalisation period, the financial sector operations were mostly based on the market forces.