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Reforms in the Financial Sector

The financial sector comprises of financial institutions like commercial banks, investment banks, foreign exchange market and stock exchange operations. This sector was controlled by the Reserve Bank of India(RBI). RBI had certain laws and stipulations through which it controlled the functioning of banks and the other financial sector firms. RBI decided on the amount of money that the banks can have, the interest rate for loans, the interest rates for deposits etc. The main purpose of these financial reforms that were introduced in 1991 was to reduce the role of RBI from being a regulator to a facilitator. This meant that the financial sector was allowed to take decisions on its own without having to consult the RBI.

These reforms led to the advent of private sector banks which were both Indian and foreign. Foreign investment limit in the banks of India was raised about 50%. Banks which fulfilled certain criterion were allowed to set up branches without having to take approval from the RBI. Banks were given freedom to generate resources from abroad and within India, but RBI was still vested with certain authority in order to safeguard the interests of the public. Foreign Institutional Investors(FII) like mutual funds, pension funds, merchant banks etc were allowed to invest in India from 1991.

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