The Reserve Bank of India Act, 1934, is a legislative Act of the Imperial Legislative Council that serves as the foundational legal framework for the establishment and functioning of the Reserve Bank of India (RBI). Enacted on March 6, 1934, and brought into force on April 1, 1935, its primary purpose was to constitute a central bank to regulate the issue of banknotes, secure monetary stability, and operate the currency and credit system of the country. The Act was passed based on the recommendations of the Hilton Young Commission (Royal Commission on Indian Currency and Finance) of 1926, which sought to solve the problem of scattered currency issues and widespread financial instability in pre-independence India.
The Act works by defining the RBI's powers and responsibilities through key provisions. Section 22 grants the RBI the exclusive right to issue currency notes in India. Section 17 defines the central banking business the RBI may transact, such as accepting deposits from the central and state governments and dealing in foreign exchange and government securities. Section 21 mandates the RBI to conduct banking affairs for the central government and manage public debt. Furthermore, Section 42(1) requires every scheduled bank (listed in the Second Schedule) to maintain a minimum average daily balance as cash reserves with the RBI. A controversial provision is Section 7, which allows the Central Government to issue directions to the RBI in the public interest after consulting the Governor.
The Act is intrinsically connected to the Reserve Bank (Transfer to Public Ownership) Act, 1948, which nationalized the RBI on January 1, 1949, making it fully government-owned. It also works alongside the Banking Regulation Act, 1949, which governs the functioning of commercial banks.
The Act has been significantly amended to adapt to modern challenges. A major change came with the Finance Act, 2016, which inserted a new chapter to provide a statutory basis for inflation targeting and constituted the Monetary Policy Committee (MPC) under Section 45ZB. Earlier, the RBI (Amendment) Act, 2006, liberalized the Cash Reserve Ratio (CRR) regime under Section 42(1) by removing the statutory floor and ceiling, giving the RBI greater flexibility in monetary control. More recently, the Finance (No. 2) Act, 2019, enhanced the RBI's regulatory powers over Non-Banking Financial Companies (NBFCs), including the power to supersede their board.