Have huge inflows of speculative capital in India's post-reform period affected the role of development institutions and banks like the National Bank for Agriculture and Rural Development (NABARD), the apex bank for institutional credit in rural India? In order to prevent a possible appreciation of the currency, which would have had an adverse effect on the real sector of the economy, the Reserve Bank of India (RBI) resorted to market intervention and the increase in the foreign exchange reserves, which would have caused a possible increase in the money supply, was neutralised by undertaking a “sterilisation” process. In the process, the RBI suffered a huge loss in its potential income and had to resort to a smaller transfer of funds to NABARD. On the other hand, NABARD, faced with an increasing demand for loans turned to open market borrowings at a higher interest rate, which ultimately led to a huge loss in its potential income. This paper finds that with the ongoing reforms, the banking system has not only sacrificed developmental aspects, but also failed to satisfy the profit norms of banking.
