Reserve Bank of India Act, 1934
Also called: RBI Act · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Beyond NCERT
Meaning
The Reserve Bank of India Act, 1934 is the law that created the RBI. Under it, the RBI started work on 1 April 1935. The Act sets out what the RBI does. It gives the RBI the sole right to issue banknotes, makes it banker to the government and to banks, and covers its reserve rules. One example is Section 42, which sets the Cash Reserve Ratio (CRR), the share of deposits that banks must keep with the RBI. A 2016 amendment added Chapter IIIF, which made flexible inflation targeting part of the law. Under it, the government sets the inflation target with the RBI (Section 45ZA), and a Monetary Policy Committee (MPC), a six-member body, decides the repo rate (Section 45ZB). The Act is amended from time to time. In 2022 "bank note" was widened to include digital form, which allows the digital rupee (e₹).
Example
Section 45ZA of the Act is used to fix the inflation target. The target is 4% CPI, with a band of 2–6%. In 2022 inflation stayed outside this band for three quarters in a row. Section 45ZN then required the RBI to send the government a report on why it missed the target and how it would fix this.
Don't confuse with
- Banking Regulation Act, 1949: this law regulates commercial banks, for example the SLR under Section 24. The RBI Act, by contrast, creates and governs the RBI itself.
- Nationalisation in 1949: the RBI was set up in 1935 under the 1934 Act. 1949 is only the year it moved to government ownership.