The Reserve Bank of India Act, 1934 is the principal legislative Act that established the Reserve Bank of India (RBI) as India's central bank. The Act was enacted on March 6, 1934, and came into force on April 1, 1935, following the recommendations of the Hilton Young Commission. The problem it solved was the absence of a central authority to oversee currency and credit, which had led to financial instability. The Act's preamble states its purpose is to regulate the issue of banknotes, secure monetary stability, and operate the currency and credit system to the country's advantage.
The Act works by providing the legal framework for the RBI's functions and powers. Section 3 established the RBI as a body corporate. Key provisions include Section 22, which grants the RBI the sole right to issue currency notes in India. Section 17 defines the business the RBI may transact, such as acting as a banker to the government and managing foreign exchange reserves. Section 42(1) mandates that scheduled banks must maintain an average daily balance with the RBI as cash reserves. The Act also contains Section 7, which empowers the Central Government to issue directions to the RBI in the public interest.
The Act connects to the Banking Regulation Act, 1949, which provides the RBI with the power to regulate and supervise banks. It also connects to the Foreign Exchange Management Act (FEMA), 1999, though the RBI remains the custodian of foreign reserves under the RBI Act's broad objectives. A significant recent change was the insertion of a new chapter on monetary policy through the Finance Act, 2016, which provided a statutory basis for inflation targeting and constituted the Monetary Policy Committee (MPC) via new sections like 45ZB. This amendment modernized the monetary policy framework. The Act has also been amended to enhance the RBI's regulatory powers over Non-Banking Financial Companies (NBFCs), such as the power to remove directors (Section 41-D) and supersede the Board (Section 45-1E). The RBI's nationalization in 1949 was achieved through a separate law, the Reserve Bank (Transfer to Public Ownership) Act, 1948, not an amendment to the 1934 Act.