1. RBI Act, 1934

The Reserve Bank of India Act, 1934 is the principal legislation that established the Reserve Bank of India (RBI) as India’s central bank. Enacted in 1934 and brought into force on 1 April 1935, the Act provides the legal basis for the RBI’s powers, functions, and responsibilities.

Historical Background and Enactment

The RBI Act, 1934 was enacted during the colonial period following recommendations of the Hilton Young Commission , which emphasised the need for a central monetary authority in India. The preamble states that the Act aims to regulate the issue of banknotes and the holding of reserves to secure monetary stability and to operate the currency and credit system in the country’s interest.

Establishment and Organisation (Section 3)

Section 3 established the RBI as a body corporate with perpetual succession. The RBI was originally privately owned but was nationalised in 1949, after which its entire share capital came to be held by the Central Government.
The governance of the RBI is vested in a Central Board of Directors consisting of the Governor, up to four Deputy Governors, and other directors appointed by the government. The Act also provides for Local Boards in four regions—Mumbai, Delhi, Kolkata, and Chennai—to advise the Central Board on regional matters.

Key Functions and Powers under the RBI Act

Monopoly of Note Issue (Section 22, 24, 26)

Under Section 22, the RBI has the sole right to issue currency notes in India (except one-rupee notes and coins, which are issued by the Government of India but put into circulation by the RBI).

The Act specifies the denominations of notes that can be issued (Section 24) and declares those notes as legal tender (Section 26). This monopoly of note issuance allows the RBI to control the volume of currency in circulation and maintain public confidence in the rupee.

Banker to Government (Section 20, 21)

The Act designates RBI as the banker, agent, and debt manager to the central and state governments (Sections 20 and 21). This means RBI maintains government bank accounts, facilitates receipts and payments on behalf of the government, and manages public debt (e.g., issuing government bonds).

RBI provides Ways and Means Advances (temporary overdrafts) to governments to meet short-term expenditure needs and advises the government on fiscal and economic matters.

Banker’s Bank & Lender of Last Resort (Section 17, 18)

The RBI Act enables the RBI to act as the banker to banks – holding the cash reserves of banks, facilitating interbank clearing and transfers, and extending financial accommodation.

Section 17 enumerates the types of business RBI can conduct, including accepting deposits from banks, discounting or rediscounting bills of exchange, and extending loans to banks. In times of crisis, Section 18 empowers RBI to provide emergency advances to banks (lender-of-last-resort function) when banks face unusual financial stress, thereby ensuring stability of the banking system.

Regulation of Banking and Credit (Section 42,

While the detailed regulation of banking companies is covered in the Banking Regulation Act, 1949, the RBI Act also contributes to oversight of the banking system. Notably, Section 42 of the RBI Act requires scheduled banks to maintain a Cash Reserve Ratio (CRR) – a percentage of their deposits – with the RBI.

By adjusting the CRR (within limits set by law), the RBI can influence liquidity in the banking system. The Act also empowers RBI to inspect banks and collect credit information.

Regulation of NBFCs (Sections 45H-45I)

Over time, amendments to the RBI Act have strengthened RBI’s regulatory powers over non-banking financial companies (NBFCs) through Sections 45J–45NB, which require NBFCs to register with RBI and follow its prudential norms.

Monetary Policy Framework and MPC (Section 45ZB)

The RBI Act lays the foundation for India’s monetary policy. It authorizes RBI to use tools like CRR and open market operations (buying/selling government securities) to influence money supply and interest rates. A significant recent amendment (in 2016) added Section 45ZB, establishing a Monetary Policy Committee (MPC).

The MPC is a 6-member committee (RBI Governor as Chair, 2 other RBI officials, and 3 external members appointed by the government) tasked with setting key policy rates (like the repo rate) to meet the inflation target defined in the Act. This has made ...

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