The Reserve Bank of India Act: An Overview


In 1934, to regulate the banking sectors and their activities the Reserve Bank of India Act legislated. As a result of this legislation, the Reserve Bank of India, a national bank, was established in the same year.

What does the Reserve Bank of India Act Define?

The Royal Commission in 1926 recommended the creation of a Central Bank of India. In 1933, the white paper on Indian Constitutional Reforms recommended the creation of the RBI, and a bill to this effect was introduced. The Bill was passed and came into effect on April 1st, 1935, and RBI was established. It is the national bank of India that controls and regulates the monetary policy of the country. The objectives of the RBI are to issue bank notes, maintain monetary stability in India and regulate the credit system in India.

Establishment of RBI

Section 3 of the Act provides that the Reserve Bank of India shall be constituted for the purpose of taking over the management of the currency from the Central Government and carrying on the business of banking. Furthermore, the general superintendence and direction of the affairs and business of the bank shall be entrusted to a central board of directors.

Central Board of Directors

The Central Board of Directors follows the guidelines of the Act and is appointed by the Central Government. These directors are appointed for a period of four years, and the Governor and Deputy Governor are appointed for a term not exceeding five years. All are eligible for re-appointment.

As per Section 8 of the Act, the composition of the Central Board is as follows −

Central Board shall hold its meeting at least six times per year, and once every three months.

Local Boards

As per Section 9 of the Act, the RBI shall have local boards in each of the four areas specified in the First Schedule. RBI has four local boards:

  • Western Board

  • Eastern Board

  • Northern Board

  • Southern Board

Each board has five members appointed by the Central Government, and each member has a term of office of four years.

The Local Boards advise the Central Board on matters referred to them and perform duties delegated to them by the Central Board.

Sections 10 and 11 contain provisions regarding disqualifications for membership of the local board and removal or vacation of office.

RBI's Operations

Section 17 is one of the most important sections as it lays down the functioning of the RBI. According to the section, the RBI acts as the government's banker, accepting deposits from the government and making interest-free advances to the government. It has exclusive authority to issue Indian currency. It can purchase, sell, and rediscount bills of exchange and promissory notes drawn or payable in India. It can buy foreign exchange and offer it to commercial banks. It performs various other similar functions.

Functions of RBI

As per Sections 20 and 21B, the RBI acts as a banker to the government. It transacts all the financial business of the government, and the government keeps its money balance on the current account deposits with RBI. It gives short-term credit to the government. It manages all the public debts of the government. It also acts as a guardian of foreign exchange reserves.

Sections 22–29 state that the RBI has the functions of issuing notes, foreign reserve management, development, collection, and publication of public data, promotion, supervision, etc.

Prohibited Transactions

Section 19 of the Act enumerates certain business transactions that are prohibited 

  • Purchase of shares in any banking or other company, or grant of loans secured by such shares.

  • Advance money on an immovable property mortgage or own immovable property.

  • Make advances or loans.

  • Draw or accept bills payable otherwise on demand.

  • Allow interest on deposits or current accounts.

  • Engage in trade.

Monetary Policy Committee

Section 45ZB of the Act provides that a monetary policy committee shall be constituted to determine the policy rate required to achieve the inflation target. The decision of the committee is binding on the RBI. The Committee has to meet at least four times a year with a quorum of four members. The bank has to publish the conclusion and the resolution taken in the meeting of the Committee, and a report to this effect shall be published every six months.

Penalties

Section 58B of the Act provides for penalties that can be imposed by the RBI on various offenders.

Schedule

The first schedule of the Act mentions four areas in which Indian states should cooperate. The second schedule lists all the scheduled banks in India.

Conclusion

The Reserve Bank of India Act, 1934, is a piece of British legislation that was passed with the intention of governing and regulating the operations of various banks, and it established the Reserve Bank of India to monitor and control such banking activities. Along with the Companies Act, the Reserve Bank of India Act, 1936, was meant to provide a framework for the supervision of banking firms in India.

Frequently Asked Questions

Q1. What is the Reserve Bank Act 1989?

Ans: In comparison to the Reserve Bank Act of 1934, the 1989 Act has given more power and independency to the Reserve Bank. Now, RBI can formulate and implement more flexible and personalize monetary policy as it thinks appropriate in the current situation.

Q2. What is main function of RBI?

Ans: Reserve Bank of India is a bank of the banks and banker to the Government; so the major functions of RBI are to 

  • Issue and regulate the bank notes;

  • Administer the monetary policy;

  • Issue currency;

  • Manage managing foreign exchange;

  • Work as a bank for government and as a banker of scheduled commercial banks.

Q3. Who was the first Governor of the RBI?

Ans: The first Governor of the RBI was Sir Osborne Smith. He was a professional banker, served for over 20 years with the Bank of New South Wales and 10 years with the Commonwealth Bank of Australia. In 1926, he returned back to India and joined as a Managing Governor of the Imperial Bank of India before joining as the Governor of the RBI.

Updated on: 11-Jan-2023

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