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 monetary policy decisions more transparent and goal-oriented (India currently follows an inflation-targeting framework under the Act).

Foreign Exchange Management (Section 40)

Originally, the RBI Act empowered RBI to maintain the external stability of the rupee and manage foreign currency reserves (Section 40). While the detailed laws on foreign exchange are now contained in the FEMA, 1999, the RBI continues to act as the custodian of foreign reserves and manages exchange rate policy in line with the Act’s broad objectives.

Reserve Fund and Surplus (Section 46, 47)

The Act created the Reserve Fund (Section 46) to which a portion of RBI’s annual profits are transferred until it reaches a specified size. Section 47 stipulates that after making provisions for bad debts, depreciation, and the Reserve Fund, the remaining surplus of RBI’s profits is transferred to the central government. This forms a part of the government’s revenue (dividend from RBI). Changes in these provisions (such as the formation of a surplus distribution policy) have significant fiscal implications.

Government Oversight (Section 7)

Section 7 allows the central government to issue directions to the RBI in public interest, in consultation with the RBI Governor. This section, rarely used, underscores the balance between RBI’s autonomy and the sovereign’s oversight. It was a topic of debate in recent years when the government invoked Section 7 discussions during 2018 disagreements with the RBI. Generally, however, the RBI enjoys a high degree of operational autonomy under the Act, which is crucial for unbiased monetary policy decisions.

Important Sections to Remember (RBI Act, 1934)

For exam purposes, some key sections and their themes include:

• Section 3: Establishment of RBI (as of 1935; nationalized in 1949).
• Section 7: Central Government’s power to give direction to RBI (public interest clause).
• Section 17: Basic business the RBI can conduct (defines RBI’s functions like accepting deposits, lending to banks, issuing bills, etc.).
• Section 18: Emergency loans to banks (RBI as lender of last resort).
• Section 22: Sole right to issue banknotes (note issue authority).
• Section 24: Denominations of notes (current limit up to ₹10,000 note – although ₹5,000 and ₹10,000 notes, if ever issued, would require government approval).
• Section 26: Legal tender status of RBI-issued notes; also the provision under which demonetization can be carried out with government approval.
• Section 42: Cash Reserve Ratio requirements for scheduled banks (and Second Schedule of the Act lists “scheduled banks” which must keep CRR; inclusion in this schedule grants a bank certain privileges like RBI accommodation).
• Sections 45H-45I: Regulation of Non-Banking Financial Companies (definition of deposit-taking NBFCs, requirement of registration with RBI, etc.).
• Section 45ZB: Establishment of Monetary Policy Committee (for inflation targeting and policy rate decisions).

Evolution through Amendments

Since its enactment, the RBI Act, 1934 has undergone several amendments to adapt to changing economic conditions. These amendments have expanded the RBI’s role in areas such as monetary policy formulation, regulation of payment systems, and financial stability. Important Amendments are as follows:

Early Amendments (Pre-independence Till 1956)

Before Independence, RBI Act was amended in 1940 for early adjustments to the provisions of the act. Then some amendments around late 1940s and early 1950s were related to definitions and territorial applicability (e.g., changes due to India/Burma separation, extension to new territories).

Kindly note that RBI Act was not amended for its Nationalization. Rather a new standalone act Reserve Bank (Transfer to Public Ownership) Act, 1948 was passed which transferred all shares of the RBI from private shareholders to the Government of India and provided for compensation to existing shareholders. This act converted RBI from a shareholder-owned central bank into a fully government-owned institution.

RBI (Amendment) Act, 1956

This amendment adjusted financial and reserve provisions in the RBI Act (e.g., note issuance backing requirements and reserve conditions).

RBI (Amendment) Act, 2006 (effective 9 Jan 2007)

This amendment mainly liberalised the Cash Reserve Ratio (CRR) regime under Section 42. The most important statutory change was in Section 42(1), where the RBI was given greater flexibility in prescribing CRR — i.e., no statutory floor/ceiling was specified, allowing the RBI to fix it at any level necessary for monetary stability. This replaced the earlier statutory cap of 9% for CRR. In the same amendment, sub-section 1B was omitted (which earlier mandated payment of interest on CRR balances), meaning the RBI does not pay interest on CRR balances maintained by scheduled commercial banks. This amendment provided greater flexibility for RBI in monetary control and CRR management.

Finance Act, 2016 — Statutory Monetary Policy Committee (MPC)

The RBI Act was amended with Finance Act 2016 to insert an entire new chapter on monetary policy aimed at providing a statutory basis for inflation targeting and the MPC. It added chapter III-F (Monetary Policy) and new sections were added as follows:

• 45Z – Provisions of this Chapter to override other provisions
• 45ZA – Inflation target
• 45ZB – Constitution of Monetary Policy Committee (MPC)
• 45ZC – Eligibility & selection of members
• 45ZD – Terms & conditions of appointment of MPC members
• 45ZE – Removal of Members of MPC
• 45ZF – Vacancies, etc., not to invalidate proceedings
• 45ZG – Secretary to MPC
• 45ZH – Information for MPC members
• 45Z-I – Meetings of the MPC
• 45ZJ – Steps to be taken to implement decisions
• 45ZK – Publication of decisions
• 45ZL – Publication of proceedings
• 45ZM – Monetary Policy Report
• 45ZN – Failure to maintain inflation target
• 45ZO – Power to make rules under this chapter

These provisions established the statutory mandate, composition, functions, reporting and accountability (inflation target) associated with India’s Monetary Policy Committee.

Banking Laws (Amendment) Act, 2025

Banking Laws (Amendment) Act, 2025 modernizes banking regulations by strengthening governance, improving depositor protection (allowing up to four nominees), enhancing audit quality in Public Sector Banks (PSBs), and streamlining reporting to the RBI, including rationalizing director tenure in co-operative banks and updating substantial interest thresholds, bringing India’s banking framework closer to modern digital and global standards. It amended key laws, including the RBI Act, Banking Regulation Act, SBI Act, and Banking Companies (Acquisition and Transfer of Undertakings) Acts.  Its key provisions are as follows:

• Depositor Protection (RBI act section 10-13): Introduces modernized nomination facilities, allowing up to four nominees (simultaneous with percentage allocation or successive) for accounts and lockers, ensuring smoother succession.
• Governance:  Strengthens governance standards, ensuring uniformity in reporting to the RBI and improving audit quality in PSBs.
• Co-operative Banks:  Rationalizes the tenure of directors, increasing the maximum term (excluding Chairman/Whole-time Directors) to 10 years, aligning with the 97th Constitutional Amendment.
• Substantial Interest:  Revises the threshold for “substantial interest” from ₹5 lakh to ₹2 crore, updating a limit that hadn’t changed since 1968.
• Operational Efficiency:  Replaces vague terms like “alternate Fridays” with concrete calendar references (e.g., “last day of the fortnight”) for operational clarity.
• Audit & Unclaimed Amounts:  Empowers PSBs to fix auditor remuneration and allows transfer of unclaimed amounts (shares, interest) to the Investor Education and Protection Fund (IEPF).