S.N.D.T.

WOMEN’SUNIVERSITY LAW SCHOOL

THE RESERVE BANK OF INDIA ACT, 1934

Submitted By:
JOVILA
LL. M 1st Year
Roll No: 12

Submission (Month & Year)

th
, 2022

Under the Guidance of:

Adv. __________

Page | 1
ACKNOWLEDGMENT

With profound sentiments of gratitude, I acknowledge the guidance, suggestion, and

Encouragement given by my guide Prof. _____________ because whom I was able to complete
the task of writing this project work successfully.
I am also grateful to other faculty members for their timely guidance and relevant knowledge
regarding various aspects relating to this topic. Also, I will fail in my duty if I don’t thank the
Library staff of S.N.D.T Women’s University Law School, who have warmly facilitated the task
by providing various books & journals, leading to the successful completion of the task.

Regards,
Jovila
Class: LLM 1st Year
Batch: 2022-23
SNDT Women’s University Law School

Page | 2
INDEX

SR. NO PARTICULARS PAGE NO

1. Introduction 4
2.
3.
4.
5.
6.
7.

Page | 3
INTRODUCTION

Under its Act, the Reserve Bank of India is entrusted with the responsibility for 'securing
monetary stability in India and generally to operate the currency and credit system of the
country to its advantage'. The wide range of responsibilities it felt moved to discharge
during the 1950s and 1960s might appear at first glance to confound the laconic prose of
the Bank's founding legislation, if not dilute its principal mandate. Monetary policy was
the Reserve Bank's most important function, but it was one that it had to perform in a
setting radically different from that found in traditional textbooks on the subject.

In recent years, relations between central banks and governments have become a topic of
intense debate the world over. The concluding chapter of the book surveys the evolution
of these relations in the Indian context, which in important political and constitutional
respects too, is unique for any central bank, in the background of the wide diversity of its
responsibilities and the intellectual and institutional influences to which it was subject.
This chapter discusses the effects which these features of the Reserve Bank's context and
functioning may have had on the freedom and effectiveness of its monetary policies, and
closes with a brief assessment of its successes and failures during our period.

India being largely an agrarian economy, the demand for bank credit was subject to
strong seasonal influences. These influences weakened but did not entirely disappear by
1967. The busy season, which ran from about October to April each year, was usually
characterized by a surge in the demand for credit.
The Reserve Bank of India is the central bank of the country. Central banks are a
relatively recent innovation and most central banks, as we know them today, were
established around the early twentieth century.
The Reserve Bank of India was set up based on the recommendations of the Hilton
Young Commission. The Reserve Bank of India Act, 1934 (II of 1934) provides the
statutory basis for the functioning of the Bank, which commenced operations on April 1,
1935.
The Bank was constituted to: -
Page | 4
   *Regulate the issue of banknotes 
 * Maintain reserves with securely stability and
 * To operate the credit and currency system of the country to its advantage.

An interesting feature of the Reserve Bank of India was that at its very inception Bank
was seen as playing a special role in the context of development, especially Agriculture.
When India commenced its plan endeavors, the development role of the Bank came into
focus, especially in the sixties when the Reserve Bank, in many ways, pioneered the
concept and practice of finance to catalyze development. The Bank was also instrumental
in institutional development and helped set up institutions like deposit the it range and
Credit Guarantee Corporation of India, the Unit Trust of India, the Industrial
Development Bank of India, the National Bank of Agriculture and Rural Development,
the Discount and Finance House of India, etc to build the financial infrastructure of the
country.

With liberalization Bank's focus has shifted back to core central banking functions like
Monetary Policy, Bank Supervision and, Regular Overseeing the Payments System and
developing the financial markets.

OVERVIEW

The Orig of the Reserve Bank of India can be traced to 1926, when the Royal
Commission on Indian Currency and Finance – also known as the Hilton-Young
Commission – recommended the creation of a central bank for In the ia to separate the
control of currency and credit from the Government and to augment banking facilities
throughout the country. The Reserve of India Act of 1934 established the Reserve Bank
and set in motion a series of actions culminating in the start of operations in 1935. Since
then, the Reserve Bank’s role and functions have undergone numerous changes, as the
nature of the Indian economy and financial sector changed.

Page | 5
 The central bank of India, RBI is also regarded as a bank of its owing to its functions of
RBI. It was established on April 1, 1935, under the paid Bank of India Act, 193crores the
beginning, the headquarters of RBI was established in Calcutta issuing- 1937, it was
permanently shifted to Mumbai. 

As of October the21, ta he Governor of the Reserve Bank of India is Mr Shaktikanta Das.

He is the 25th RBI Governor and all the RBI functions are supervised by him.

ORIGIN OF THE RESERVE BANK OF INDIA

 1926: The Royal Commission on Indian Currency and Finance the economic
creation of a central bank for India.  1927.
 A bill to give effect to the above recommendation was introduced in the
Legislative Assembly, but was later withdrawn due to lack of agreement among
various sections of people.  1933.
 The White Paper on Indian Constitutional Reforms recommended the creation of
a Reserve Bank. A fresh bill was introduced in the Legislative Assembly. 
1934operates Bill regulated direct received the Government assent General’s
assen in  1935.
 The Reserve Bank commenced operations as India’s central bank on April 1 as a
private shareholder paid up with a paid-up capital crore rupees five crore (rupees
fifty million).  1942.
 The Reserve Bank currency issuing authority of Burma (now Myanmar).  1947.
 The Reserve Bank stopped acting as banker a to the Government of Burma. 
1948: The Reserve Bank acted as a center service services to Pakista  1949: The
Government of India nationalized the Reserve Bank under the Reserve Bank
(Transfer of Public Ownership) Act, 1948.

Page | 6
Starting as a private shareholders’ bank, the Reserve Bank was nationalized in 1949. It then
assumed the responsibility to meet the aspirations of a newly independent country and its people.
The Reserve Bank’s nationalized at achieving coordination between the policies of the
government and those of the central bank.

MEANING & DEFINITION

“Central Bank is an ‘apex’ body operate regulates, operates directs regulate and direct the entire
banking and monetary structure of the country”.

It is known as the apex (Supreme) the as it topmost position in the monetary and banking system
of the country. All the financially developed countries have their own central bank. India’s RBI
was established on April 1, 1935, under the Reserve Bank of India Act passes in 1934. Central
Bank is known by different names in different countries of India, it is Reserve Bank of India
(RBI), in the UK Bank of England and in the USA, it has known as Federal Reserve System.

FUNCTION OF THE RESERVE BANK

The functions of the Reserve Bank today can be categorized as follows:

 Monetary policy
 Regulation and supervision of the banking and non-banking financial institutions,
including credit information companies
 Regulation of money, forex and government securities markets as also certain
financial derivatives
 Debt and cash management for Central and State Governments
 Management of foreign exchange reserves
 Foreign exchange management—current and capital account management
Banker to banks  Banker to the Central and State Governments
 Oversight of the payment and settlement systems

Page | 7
  Currency management
 Developmental role
 Research and statistics
 Issue of Bank Notes
 Banker to the Government
 Custodian of the Cash Reserves of Commercial Banks
 Custodian of the country’s forex reserves
 Lender of last resort
 Controller of credit

The Issuer of Bank Notes

The most important function of RBI is the issuance of currency notes and coins, except the one
rupee note and coin which are issued by the Ministry of Finance. All other notes bear the
signature of the RBI Governor. However, the agency of distribution of all notes and coins issued
by the Government of India is the Reserve Bank of India.

Banker to the Government

Another chief function of RBI is that it takes care of the banking needs of the government, which
includes maintaining & operating the deposit accounts of the government, collecting the receipts
of funds, and making payments on behalf of the Government of India. It also represents the
Indian Government, as a member of the International Monetary Fund and the World Bank.

Controller of Credit

RBI controls the credit created by the commercial banks in India, to the economic priorities of
the government of India. RBI uses quantitative and qualitative methods to control and regulate
the flow of money in the market. These are implemented by announcing monetary policies at
regular intervals. The monetary policy involves the management of interest rates and money
supply. The central bank of India tweaks the money supply to achieve objectives such as
liquidity, inflation, and consumption.
Page | 8
A. Repro Purchase Rate: - Repo rate is the rate at which the Central Bank of a country
lends money to Commercial banks to meet their short-term needs. The Central bank
advances loans against approved securities or eligible bills of exchange. An increase in
repo rate increases their lending rates, which discourages borrowers from taking loans.

B. Bank rate or Discount rate:- Bank rate is the rate at which the Central Bank of a
country lends money to Commercial Banks to meet their long-term needs. RBI has been
actively using Bank rates to control credit. The bank rate has the same effect as that of the
Repo rate.

C. Open Market Operations:- Open Market Operations (OPM) refers to buying and
selling of Government securities by the Central Bank from/to public and commercial
banks. It does not matter whether the securities are bought or sold to the public or banks
because ultimately the amount will be deposited in or transferred from some bank.

D. Legal Reserve Requirement (Variable Reserve ratio Method):-

i. Cash Reserve ratio (CRR):- It refers to the minimum percentage of net demand
and time liabilities, to be kept by commercial banks with the Central bank. An
increase in CRR reduces the excess reserves of commercial banks and limits
credit-creating power.
ii. Statutory Liquidity Ratio (SLR):- It refers to the minimum percentage of net
demand and time liabilities that Commercial banks are required to maintain
themselves. An increase in SLR reduces the ability of banks to give credit and
vice-versa.

Banker’s Bank and Supervisor

As the bankers to banks, the Central Bank function in three capacities: -

Page | 9
 Custodian of Cash Reserves of Commercial Banks

Commercial banks are required to maintain cash reserves at a rate decided by the RBI in its
monetary policy.

Custodian of Foreign Exchange Reserve

Another of the important functions of RBI is maintaining a reserve of foreign currencies that
enables the RBI to deal with any crisis.

Lender of the Last Resort

Often regarded as the banker of banks, the RBI acts as a parent to all commercial banks in India.
Thus, it becomes the lender of the last resort for all banks when they are in a crisis. RBI helps
them by lending money at higher RoI to sail through the tide of financial difficulties.

Clearing House

All commercial banks have their account with the Central Bank. Therefore, the
central Bank can easily settle claims of various economical banks against each other,
by making debit and credit entries in their accounts.

As a supervisor, Central Bank regulates and controls Commercial Banks. The

regulation of Banks may be related to their licensing, branch expansion, the liquidity
of assets, management, merging, winding up, etc. The control is exercised by periodic
inspection of banks and the return filed by them.

Page | 10
PROMOTIONAL FUNCTIONS OF RBI

Various promotional functions performed by the Reserve Bank of India are given below: -

a. Promotion of Banking Habits: - The RBI helps in mobilizing the saving of the people for
investment. It expands the banking system throughout institutions like UTI, IDBI, IRCI,
NABARD, etc. Thereby it promoted banking habits among the people.

b. Providing Refinance for Exports:- The RBI is providing refinance for export promotion. The
Export Credit and Guarantee Corporation (ECGC) and Export-Import Bank were established
initially by RBI to finance foreign trade in India.

c. Providing Credit to Agriculture:- RBI makes institutional arrangements for rural or agricultural
finance. E.g., the bank has set up special agricultural credit cells. It has promoted regional rural
banks with the help of commercial banks. It has promoted NABARD.

d. Providing Credit to Small-Scale Industrial Units:- Commercial banks lend loans to small-scale
industrial units as per the directives issued by the RBI from time to time. The TBI encourages
Commercial banks to render guarantee services also to the small-scale industrial sector. RBI
directed Commercial Banks to open specialized branches to provide adequate financial and
technical assistance to small-scale industrial branches.

OBJECTIVES OF RBI

The objectives of the Central Bank of India are: -

1. To help ensure the monetary, stability of the country.

2. To assist in regulating the financial system of the country.
Formulate, implement, and monitor the monetary policy.
3. To maintain liquidity in the country.
4. To ensure an adequate flow of credits.
5. Prescribes parameters for banking in the country.

Page | 11
 6. Maintain public confidence in the system.
7. To manage the foreign management Act.
8. To facilitate external trade.
9. Issue and exchange currency.
10. Maintain the supply of currency.
11. Own and operate the depository and exchange for government bonds.
12. Banker to the government.
13. To stabilize the internal and external value of the rupee.
14. To centralize the cash reserve of commercial banks.
15. To establish monetary relations with other countries of the world and international
financial institutions.

ACHIEVEMENTS OF RBI (CENTRAL BANK)

1. Flexible Monetary Policy:- The RBI has adopted a flexible monetary policy. It has
introduced changes in the monetary regulations of the Indian money market. The
pressure of seasonal demand has been adequately met.
2. Stable Structure of Interest Rate:- The interest rate policy of RBI has resulted in a
relatively stable structure of interest rates in the economy. The bank rate remains
unchanged at a low level of 3 percent up to 1951.
3. Modern Banking and Credit Structure:- The Reserve Bank has succeeded in
building up a sound modern banking and credit structure. The Bank enjoyed vast
supervisory powers which enabled it to guide the development of banking on sound
lines.
4. Cheap Remittance facilities: The Reserve bank has introduced very cheap remittance
facilities. These have been widely used by Commercial Banks, the Government, and
Cooperative Banks.

Page | 12
 5. Successful Management of Public Debt: The RBI has successfully managed public
debt. It has floated loans for the Govt. at low rates of Interest. It has helped in raising
the funds for the expansion of the public sector in the economy.
6. Exchange Stability: The RBI has maintained the exchange value of the rupee at a
relatively higher rate than would have prevailed in the market. It has made judicious
use of exchange control measures to keep the demand for foreign exchange within the
limits of available supplies.
7. Enhanced Public Confidence in the Banking Sector: Banks are strictly supervised
by Reserve Bank to avoid their failures and enhance public confidence in the banking
systems. The Deposit Insurance System has also been introduced to protect the
interests of investors.
8. Central Authority Of the Indian Money Market: The RBI has functioned as the
central authority in the Indian money market. It has supervised and controlled
Commercial Banks, Cooperative Banks, and Non-banking Financing Companies
accepting deposits from the Public.
9. Development of Bill Market: The RBI has made serious efforts to develop a sound
bill market in India. It has imparted a Substantial degree of elasticity to the credit
structure of the country by introducing several Bill Market Schemes
10. Monetary Stability: The Bank has made rational use of quantitative and qualitative
measures of credit control to main monetary stability. These controls were generally
employed in the direction of greater restraint in t/ context of persistent imbalances in
the economy.
11. Contribution to Economic Development: The RBI has played an active role in
promoting the economic development of the Indian economy. Reserve Bank has
helped in building up a well-differential structure of financial institutions to cater to
the requirements of the different sources of the economy.

On 12 November 2021, the Prime Minister of India, Narendra Modi, launched two new schemes
which aim at expanding investments and ensuring more security for investors. The two new
schemes include the RBI Retail Direct Scheme and the Reserve Bank Integrated Ombudsman

Page | 13
 Scheme. The RBI Retail Direct Scheme is targeted at retail investors to invest easily in
government securities. According to RBI, the scheme will allow retail investors to open and
maintain their government securities account free of cost. The RBI Integrated Ombudsman
Scheme aims to further improve the grievance redress mechanism for resolving customer
complaints against entities regulated by the central bank. The RBI makes it mandatory for all the
banks in India to have a safe box in their own respect strong room. However, the exception is
given to the Regional Banks and the SBI branches located in the rural areas but a strong room is
compulsory.

FAILURES OF RBI

Identified Failures of an RBI Program

a. Please note: Client = Operator, Vendor = RBI Consultant/Services Organization

b. No Structured Approach to an RBI Program (ClienUVendor Issue)
c. The RBI Tool Implementation is completed by unqualified personnel and
management (both ClienUVendor) and it’s "Check the box"
d. Once RBI Tool is Implemented, the Client is expected to be an "Expert" with No
Operational Documentation - Specifically for the Sustain Phase
e. No Transition or Change Management Process from Time Based to an RBI
Program
f. People do not employ alternative investment options. A large section of society
still depends on saving accounts, fixed deposits, Public Provident Fund for
investment. Commercial banks have large deposits. RBI is not the main or even
prominent money supplier for these banks. So whatever monetary action central
bank takes has little or late impact on the economy.
g. Many people in rural areas are out of the banking net and whatever the RBI does,
has no impact on their financial activities.
h. Monsoon uncertainty adversely affects food production and thereby cause food
inflation. Monetary policy has no impact on food inflation.

Page | 14
1. Lack of Adjustment in the Money Market: RBI has virtually failed in
regulating or controlling the activities of rural money lenders and other
indigenous bankers. These bankers just do not come within the scope of the
Reserve Bank.

2. Lack of Uniformity in the Rate of Interest: Because of the lack of control

over different sectors of the money market, different rates of interest continue
to prevail outside the organized sector of the money market, ROI is
exorbitantly higher than the Rank Rate.

3. Lack of Bill Market: RBI prepared a plan for the development of the Bill
Market in 1952. But to date, there is no Independent and Organised
widespread bill market in India.

4. Insufficient Availability of Agricultural Credit: Even though a lot of steps

have been initiated by RBI to provide enough agricultural credit, its
requirement is still being dominated by rural money lenders and other
indigenous bankers.

5. Insufficient Banking facility: Most of the banking activity is concentrated in

urban areas. People in small villages and sub-urban areas are still deprived of
the banking facility.

6. Instability in the Internal Value of the Rupee: It has been the biggest
failure of RBI because of the ever-increasing circulation of money, prices
have been rising almost non-stop.

Page | 15
7. Failure of the Banks: RBI has also failed as a Bank of bankers, its lack of
assistance to the Commercial Bank caused its closure. Between 1939 to 1946
nearly 444 Bank failed in the country. The closure of three bank in 1985 is
also a notable point.

8. Failure in Getting Sufficient Share in Foreign Exchange Business for the

Indian Banks: The Reserve Bank has not yet succeeded in getting the
Commercial Bank any notable foreign exchange business.

9. Share Scam: In 1992-1993, the Country witnessed a large-scale share

involving hundreds of crores of rupees. It was a glaring example of the failure
of RBI.

Page | 16
CONCLUSION OF CENTRAL BANK:

Banking Systems have been with us for as long as people have been using money. Banks and
Financial Institutions provide security for individuals, businesses, and governments. In general,
what bank do is pretty easy to figure out. For the average person, Banks accept deposits, lend
loans and provides a safe place for money and valuables, and act as payment agent between
merchants and banks.

History has power banks to be vulnerable to many risks, however, including credit, liquidity,
market, operating interest rate, and legal risk, many global crises have been resulting from such
vulnerabilities and this has led to the strict regulations of state and national banks.

However, Central Bank is the backbone of all Banking sectors without which there would be no
banking sector involved. This, Central Bank is an essential part of an economy and helps to grow

Page | 17
BIBLIOGRAPHY

Secondary Sources
Books

 Book on ‘External Debt Management: Issues, Lessons and Preventive Measures

 Reports on Currency and Finance - Special Edition
 Reserve Bank of India: Functions and Working
 The Banking Ombudsman Scheme, 2002
 The Banking Ombudsman Scheme, 2006
 The Reserve Bank of India History 1935 - 1981 ( 3 Volumes )
 50 Years of Central Banking - Governors
  "Reserve Bank of India". www.rbi.org.in. Archived from the original on 16 July 2020.
Retrieved 16 July 2020.

Page | 18