RBI Act 1934

Preamble + Sections 1–13 — Detailed Decoded Version (RBI Act, 1934)

RBI Act 1934 – PREAMBLE

“An Act to constitute a Reserve Bank of India.”

Simplified:

The basic purpose of the Act is to establish the Reserve Bank of India.

“Whereas it is expedient to constitute a Reserve Bank for India to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage;”

Simplified:

The Act was enacted to create a central bank which would:

regulate the issue of banknotes;
regulate/maintain reserves;
help achieve monetary stability;
operate and regulate the country’s currency and credit system.

“AND WHEREAS it is essential to have a modern monetary policy framework to meet the challenge of an increasingly complex economy;”

Simplified:

India needs a formal and modern monetary policy framework to deal with an increasingly complex economy.

“AND WHEREAS the primary objective of the monetary policy is to maintain price stability while keeping in mind the objective of growth;”

Simplified:

The primary objective of monetary policy = price stability.

But RBI must also keep economic growth in mind.

Exam trap

Do not write:

“RBI’s monetary policy objective is growth.”

Wrong.

The statutory formulation is:

Primary objective = price stability; growth is also kept in mind.

The latter two paragraphs of the Preamble were substituted through the Finance Act, 2016.

“AND WHEREAS the monetary policy framework in India shall be operated by the Reserve Bank of India;”

Simplified:

The monetary policy framework is operated by RBI.

“It is hereby enacted as follows:—”

Simplified:

The above objectives are given legal effect through the provisions that follow.

CHAPTER I — PRELIMINARY

1. Short title, extent and commencement.

1(1)

“This Act may be called the Reserve Bank of India Act, 1934.”

Simplified:

The name of the legislation is:

Reserve Bank of India Act, 1934.

1(2)

“It extends to the whole of India.”

Simplified:

The Act applies throughout India.

The earlier words excluding Jammu & Kashmir have been omitted.

1(3)

“This section shall come into force at once, and the remaining provisions of this Act shall come into force on such date or dates as the Central Government may, by notification in the Gazette of India, appoint.”

Simplified:

Section 1 became effective immediately.
The remaining provisions became effective on dates notified by the Central Government.

Historical exam fact

The source document notes:

Sections 2–19, 47, 50–52, 55–58 and 61 came into force on 1 January 1935.
Other sections came into force on 1 April 1935.

Exam Hook

Power to appoint commencement date → Central Government.

2. Definitions.

The opening formula is:

“In this Act, unless there is anything repugnant in the subject or context,—”

Simplified

The definitions in Section 2 apply throughout the Act unless the context requires a different meaning.

This is important. A definition is not blindly applicable where the subject/context clearly requires otherwise.

2(ai)

[OMITTED]

This clause has been omitted.

Exam point: There is no operative definition under 2(ai).

2(aii) — “the Bank”

“the Bank” means the Reserve Bank of India constituted by this Act.

Simplified

Whenever the Act says “the Bank”, it means:

Reserve Bank of India.

2(aiii) — “Bank for International Settlements”

“Bank for International Settlements” means the body corporate established with the said name under the law of Switzerland pursuant to an agreement dated 20 January 1930, signed at The Hague.

Simplified

BIS = Bank for International Settlements, the international financial institution established under Swiss law pursuant to the 1930 Hague agreement.

2(aiv) — “bank note”

“bank note” means a bank note issued by the Bank, whether in physical or digital form, under section 22.

Simplified

A bank note means:

a note issued by RBI;
it can be physical or digital;
it must be issued under Section 22.

Exam Hook

S.2(aiv) = physical + digital bank note.

This definition was inserted by the Finance Act, 2022.

2(b) — “Central Board”

“the Central Board” means the Central Board of Directors of the Bank.

Simplified

Central Board = Central Board of Directors of RBI.

2(bva) — “Consumer Price Index”

“Consumer Price Index” means the Consumer Price Index Combined published by the Government of India from time to time.

Simplified

For purposes of this Act:

CPI = CPI Combined published by Government of India.

Exam Hook

The statutory inflation-target framework uses CPI.

2(bvi) — “Deposit Insurance Corporation”

“Deposit Insurance Corporation” means the Deposit Insurance Corporation established under section 3 of the Deposit Insurance Corporation Act, 1961.

Simplified

The term refers to the corporation established under the Deposit Insurance Corporation Act, 1961.

2(bvii)

[OMITTED]

The definition has been omitted.

2(bviiia) — “Exim Bank”

“Exim Bank” means the Export-Import Bank of India established under the Export-Import Bank of India Act, 1981.

Simplified

Exim Bank = Export-Import Bank of India, established under its 1981 Act.

2(bix) — “foreign currency” and “foreign exchange”

“foreign currency” and “foreign exchange” have the meanings respectively assigned to them in the Foreign Exchange Regulation Act, 1973.

Simplified

The Act adopts the meanings given to these terms under the referenced foreign-exchange legislation.

2(c) — “Industrial Finance Corporation”

“Industrial Finance Corporation” means the Industrial Finance Corporation of India established under the Industrial Finance Corporation Act, 1948.

Simplified

It refers to the institution established under the Industrial Finance Corporation Act, 1948.

2(ci) — “inflation”

“inflation” means the year-wise change in monthly Consumer Price Index expressed in terms of percentage.

Simplified

Inflation = year-on-year change in the monthly CPI, expressed as a percentage.

2(cii) — “inflation target”

“inflation target” means the inflation target determined in accordance with sub-section (1) of section 45ZA.

Simplified

The statutory inflation target is the target determined under:

Section 45ZA(1).

Chain

S.2(cii) → S.45ZA → Central Government + consultation with RBI → CPI-based inflation target.

2(ca) — International Development Association

“International Development Association” means the “Association” referred to in the International Development Association (Status, Immunities and Privileges) Act, 1960.

Simplified

IDA has the meaning given through the relevant 1960 legislation.

2(cb) — International Finance Corporation

“International Finance Corporation” means the “Corporation” referred to in the International Finance Corporation (Status, Immunities and Privileges) Act, 1958.

Simplified

IFC is defined by reference to the 1958 legislation.

2(cc) — IMF and IBRD

“International Monetary Fund” and “International Bank for Reconstruction and Development” mean respectively the “International Fund” and the “International Bank” referred to in the International Monetary Fund and Bank Act, 1945.

Simplified

The Act adopts the statutory meanings of:

IMF
IBRD/World Bank

from the 1945 Act.

2(cci) — Monetary Policy Committee

“Monetary Policy Committee” means the Committee constituted under sub-section (1) of section 45ZB.

Simplified

MPC = Committee legally constituted under S.45ZB(1).

2(ccc) — National Bank

“National Bank” means the National Bank for Agriculture and Rural Development established under section 3 of the National Bank for Agriculture and Rural Development Act, 1981.

Simplified

National Bank = NABARD.

2(ccci) — National Bank for Financing Infrastructure and Development

“National Bank for Financing Infrastructure and Development” means the Institution established under Section 3 of the National Bank for Financing Infrastructure and Development Act, 2021.

Simplified

This means NaBFID, established under the 2021 Act.

2(cccii) — other development financial institution

“other development financial institution” means a development financial institution licensed under Section 29 of the National Bank for Financing Infrastructure and Development Act, 2021.

Simplified

It means a development financial institution licensed under Section 29 of the NaBFID Act, 2021.

2(cccc) — National Housing Bank

“National Housing Bank” means the National Housing Bank established under section 3 of the National Housing Bank Act, 1987.

Simplified

NHB = National Housing Bank established under NHB Act, 1987.

2(cccci) — Policy Rate

“Policy Rate” means the rate for repo-transactions under sub-section (12AB) of section 17.

Simplified

Policy Rate = repo rate referred to in Section 17(12AB).

Exam Hook

S.2(cccci) → S.17(12AB) → Repo.

2(cv) — Reconstruction Bank

“Reconstruction Bank” means the Industrial Reconstruction Bank of India established under section 3 of the Industrial Reconstruction Bank of India Act, 1984.

Simplified

It refers to the institution established under the 1984 Act.

2(d) — “rupee coin”

“rupee coin” means rupees which are legal tender in India under the Coinage Act, 2011.

Simplified

Rupee coin = rupee coins which are legal tender under the Coinage Act, 2011.

2(e) — “scheduled bank”

“scheduled bank” means a bank included in the Second Schedule.

Simplified

A bank becomes a scheduled bank when it is included in the Second Schedule to the RBI Act.

Chain

Second Schedule → Scheduled Bank → Section 42 CRR framework.

2(ea) — “Sponsor Bank”

“Sponsor Bank” means a Sponsor Bank as defined in the Regional Rural Banks Act, 1976.

Simplified

The term gets its meaning from the Regional Rural Banks Act, 1976.

2(eb) — “State Bank”

“State Bank” means the State Bank of India constituted under the State Bank of India Act, 1955.

Simplified

State Bank = SBI.

2(el) — “Small Industries Bank”

“Small Industries Bank” means the Small Industries Development Bank of India established under section 3 of the Small Industries Development Bank of India Act, 1989.

Simplified

Small Industries Bank = SIDBI.

2(fi) — “State Financial Corporation”

“State Financial Corporation” means any State Financial Corporation established under the State Financial Corporations Act, 1951.

Simplified

It means an SFC established under the State Financial Corporations Act, 1951.

2(g) — “Unit Trust”

“Unit Trust” means the Unit Trust of India established under section 3 of the Unit Trust of India Act, 1963.

Simplified

Unit Trust = Unit Trust of India (UTI) as established under the 1963 Act.

2(h) — specified agricultural terms

The following terms:

agricultural operations;
central co-operative bank;
co-operative society;
crops;
marketing of crops;
pisciculture;
regional rural bank;
State co-operative bank;

have the meanings assigned to them under the National Bank for Agriculture and Rural Development Act, 1981.

2(i) — specified co-operative/banking terms

The following terms:

co-operative bank;
co-operative credit society;
director;
primary agricultural credit society;
primary co-operative bank;
primary credit society;

have the meanings assigned to them in Part V of the Banking Regulation Act, 1949.

CHAPTER II

INCORPORATION, CAPITAL, MANAGEMENT AND BUSINESS

3. Establishment and incorporation of Reserve Bank.

3(1)

“A bank to be called the Reserve Bank of India shall be constituted for the purposes of taking over the management of the currency from the Central Government and of carrying on the business of banking in accordance with the provisions of this Act.”

Simplified

RBI is constituted to:

take over management of the country’s currency from the Central Government; and
conduct central banking business according to the RBI Act.

Exam Hook

S.3(1) = statutory birth + purpose of RBI.

3(2)

“The Bank shall be a body corporate by the name of the Reserve Bank of India, having perpetual succession and a common seal, and shall by the said name sue and be sued.”

Simplified

RBI is a body corporate.

Therefore:

It has its own legal personality.
It has perpetual succession.
It has a common seal.
It can sue.
It can itself be sued.

4. Capital of the Bank.

“The capital of the Bank shall be five crores of rupees.”

Simplified

Statutory capital of RBI:

₹5 crore.

Exam Trap

Do not confuse this statutory capital with:

RBI’s reserves;
contingency reserve;
revaluation reserves;
net worth.

Those are different concepts.

5. Increase and reduction of share capital.

[REPEALED]

Section 5 was repealed by the Reserve Bank (Transfer to Public Ownership) Act, 1948 with effect from 1 January 1949.

Exam Hook

S.5 = Repealed.

Do not invent a current operative provision.

6. Offices, branches and agencies.

Main provision

The Bank shall, as soon as may be, establish offices in:

Bombay;
Calcutta;
Delhi;
Madras.

It may establish:

branches;
agencies;

at other places in India.

It may establish offices/branches/agencies outside India with the previous sanction of the Central Government.

Simplified

RBI has statutory authority to create:

offices + branches + agencies

within India and, with Central Government approval, outside India.

Historical footnote

The original reference to Rangoon and the proposed London branch were subsequently removed. Do not treat those historical references as current offices under Section 6.

7. Management.

7(1)

The Central Government may from time to time give directions to the Bank which, after consultation with the Governor, it considers necessary in the public interest.

Simplified

Central Government can give RBI directions when:

it considers them necessary;
they are in the public interest;
and it has consulted the Governor.

Exam Hook

Central Government → direction power.

7(2)

Subject to such directions, general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors.

Simplified

Subject to Government directions:

Central Board = overall management/superintendence of RBI.

The Board can exercise RBI’s powers and perform RBI’s acts.

7(3)

Save as otherwise provided in regulations made by the Central Board, the Governor and, in his absence, the Deputy Governor nominated by him in this behalf shall also have powers of general superintendence and direction…

Simplified

The Governor has general superintendence and direction over RBI.

If Governor is absent:

→ the Deputy Governor nominated by him exercises these powers.

Important qualification

This operates subject to regulations made by the Central Board.

8. Composition of the Central Board, and term of office of Directors.

8(1)

The Central Board consists of:

8(1)(a)

A Governor and not more than four Deputy Governors appointed by the Central Government.

Simplified

1 Governor
Maximum 4 Deputy Governors
All appointed by Central Government.

8(1)(b)

Four Directors nominated by the Central Government, one from each of the four Local Boards constituted by section 9.

Simplified

4 Directors
One representing each Local Board.
Nominated by Central Government.

8(1)(c)

Ten Directors nominated by the Central Government.

Simplified

Central Government nominates 10 additional Directors.

8(1)(d)

Two Government officials nominated by the Central Government.

Simplified

Central Government nominates 2 Government officials.

Therefore Central Board composition:

Governor + ≤4 DGs + 4 Local Board Directors + 10 Directors + 2 Government officials.

8(2)

Governor and Deputy Governors:

must devote their whole time to RBI affairs;
receive salary and allowances determined by Central Board;
such determination requires Central Government approval.

First proviso to 8(2)

Central Board may permit Governor/DG to undertake:

part-time;
honorary work;

at the request of:

Central Government; or
State Government;

provided:

it is not likely to interfere with RBI duties; and
Central Board considers it necessary in public interest.

Simplified

Full-time RBI leadership is the rule.

Part-time honorary work is possible only if:

public interest + Government request + no interference with RBI duties.

Second proviso to 8(2)

Central Government may, after consultation with RBI:

appoint a Deputy Governor as Chairman of NABARD;
on terms and conditions specified by Government.

8(3)

A Deputy Governor and the Director nominated under Section 8(1)(d):

may attend Central Board meetings;
may participate in deliberations;
but ordinarily cannot vote.

Proviso

If Governor cannot attend a meeting:

→ a Deputy Governor authorised by Governor in writing may vote on Governor’s behalf.

Exam Trap

Do not say every Deputy Governor has a normal voting right on the Central Board.

The provision specifically says the Deputy Governor and 8(1)(d) Government Director may participate but are not entitled to vote, subject to the Governor-absence proviso.

8(4) — Governor and Deputy Governor tenure

Governor and Deputy Governor:

hold office for a term not exceeding 5 years;
term is fixed by Central Government at appointment;
are eligible for reappointment.

8(4) — Directors under 8(1)(c)

The 10 Directors nominated under 8(1)(c):

hold office for 4 years;
are eligible for reappointment;
but cannot be appointed for more than 2 terms;
maximum = 8 years, continuously or intermittently.

8(4) — Directors under 8(1)(d)

Government officials nominated under 8(1)(d):

hold office during the pleasure of the Central Government.

8(5)

No act or proceeding of the Board shall be questioned merely because there is a vacancy in, or defect in constitution of, the Board.

Simplified

A vacancy or defect in Board composition does not automatically invalidate its acts/proceedings.

Memory

Vacancy ≠ automatic invalidity.

8(6)

[OMITTED]

This subsection has been omitted.

8(7)

A retiring Director shall be eligible for re-nomination.

Simplified

A retiring Director can be nominated again, subject to other statutory restrictions — particularly the two-term/eight-year restriction applicable to Directors under Section 8(1)(c).

9. Local Boards, their constitution and functions.

9(1)

A Local Board is constituted for each of the four areas specified in the First Schedule.

Each Local Board:

has 5 members;
members are appointed by Central Government;
members should, as far as possible, represent:
- territorial interests;
- economic interests;
- interests of co-operative banks;
- interests of indigenous banks.

Simplified

There are:

4 Local Boards × 5 members each.

9(2)

Members of the Local Board elect one person from among themselves as:

Chairman of the Local Board.

9(3)

The members of a Local Board hold office for the statutory term prescribed for them and are eligible for reappointment, subject to the statutory framework and amendments reflected in the Act.

Important

The source text’s historical amendment footnotes need to be read alongside this provision because the original wording has been amended over time. The operative framework is reflected in the current consolidated text.

9(4)

A Local Board shall advise the Central Board on such matters as may be generally or specifically referred to it and shall perform such duties as the Central Board may delegate to it.

Simplified

Local Boards have two core roles:

1. Advisory role

They advise Central Board on matters referred to them.

2. Delegated role

They perform duties delegated by Central Board.

Memory

Local Board = Advise + Execute delegated duties.

10. Disqualifications of Directors and members of Local Boards.

10(1)

No person can be a Director or Local Board member if:

10(1)(a)

The person is a salaried Government official.

Simplified

Ordinary salaried Government officials cannot simultaneously hold these positions.

10(1)(b)

The person:

has been adjudicated insolvent; or
has suspended payment to creditors; or
has compounded with creditors.

Simplified

A person with serious insolvency/creditor issues is disqualified.

10(1)(c)

The person:

is found lunatic; or
becomes of unsound mind.

Simplified

Unsoundness of mind creates disqualification.

10(1)(d)

The person is:

officer or employee of any bank.

Simplified

Bank employees/officers cannot ordinarily simultaneously serve as RBI Director/Local Board member.

10(1)(e)

The person is a Director of:

a banking company as defined under Section 5(c) of the Banking Regulation Act, 1949; or
a co-operative bank.

Simplified

A serving bank director is disqualified.

10(2)

Two persons cannot simultaneously be Directors/members of the same Local Board if:

10(2)(a) — common mercantile firm

They are partners of the same mercantile firm.

10(2)(b) — common private company

They are Directors of the same private company.

10(2)(c) — agency relationship

One:

is the general agent of the other; or
holds power of procuration from the other; or
holds power of procuration from a mercantile firm of which the other is a partner.

Simplified

The provision prevents excessive personal/business interconnection among members of the same Local Board.

10(3)

The restrictions under:

10(1)(a) — Government official;
10(1)(d) — bank employee/officer;
10(1)(e) — bank director;

do not apply to:

Governor;
Deputy Governor;
Government official nominated under Section 8(1)(d).

Exam Trap

There are statutory exceptions for these RBI Central Board positions.

11. Removal from and vacation of office.

11(1)

Central Government may remove from office:

Governor;
Deputy Governor;
any other Director;
any member of a Local Board.

Simplified

Central Government = removal authority for these positions.

11(2)

A Director nominated under:

Section 8(1)(b), or
Section 8(1)(c)

ceases to hold office if, without leave of Central Board, he:

absents himself from three consecutive meetings of the Central Board convened under Section 13(1).

Exam Hook

3 consecutive Central Board meetings without leave → cessation of office.

11(3)

Central Government shall remove a Director if he becomes subject to any disqualification under:

Section 10(1); or
Section 10(2).

For a Local Board member:

→ Central Board removes the member.

Very important distinction

Director → Central Government removes

Local Board member → Central Board removes

11(4)

A Director or Local Board member who is removed/ceases to hold office under the relevant subsections:

cannot be reappointed as Director or Local Board member;
until expiry of the original term for which the appointment was made.

Simplified

Removal has a cooling-off period equal to the remaining/original term.

11(5)

If a person is a:

Member of Parliament; or
Member of a State Legislature;

his nomination as Director/Local Board member is void unless he ceases to be such member within 2 months from nomination.

Conversely, if an existing Director/Local Board member is elected or nominated to Parliament/State Legislature:

→ he ceases to be Director/Local Board member from the date of such election/nomination.

Exam Hook

2 months to vacate legislative membership after nomination.

11(6)

A Director may resign by submitting resignation to:

Central Government.

A Local Board member may resign by submitting resignation to:

Central Board.

The office becomes vacant once resignation is accepted.

Memory

Director → CG

Local Board member → Central Board

12. Casual Vacancies and absences

12(1)

If Governor or Deputy Governor becomes:

incapable of performing duties due to infirmity or otherwise; or
absent on leave; or
absent in circumstances which do not involve vacation of office,

Central Government may appoint another person to officiate.

But:

Central Government considers recommendations of Central Board;
the officiating person may be an RBI officer despite the disqualification under Section 10(1)(d).

Simplified

Temporary inability/absence of Governor/DG:

CG can appoint an officiating person after considering Central Board’s recommendation.

12(2)

[OMITTED]

The subsection has been omitted.

12(3)

If a casual vacancy occurs in the office of a Local Board member:

→ Central Board may nominate a person recommended by the other members of that Local Board.

Simplified

Local Board vacancy:

Other Local Board members recommend → Central Board nominates.

12(4)

If a casual vacancy occurs in the office of a Director, other than vacancies covered by Section 12(1):

→ vacancy is filled by the Central Government.

12(5)

A person nominated to fill a casual vacancy:

→ holds office only for the unexpired portion of the predecessor’s term.

Exam Hook

Casual vacancy does not restart a fresh full term.

13. Meetings of the Central Board.

13(1)

Meetings of the Central Board shall be convened by the Governor:

at least 6 times in every year; and
at least once in every quarter.

Exam Hook

Central Board = 6/year + 1/quarter.

13(2)

Any 4 Directors may require the Governor to convene a meeting.

The Governor must then forthwith convene the meeting.

Exam Hook

4 Directors → can demand meeting.

13(3)

The meeting is presided over by:

Governor; or
if Governor is unable to attend, the Deputy Governor authorised under the proviso to Section 8(3).

In case of equality of votes

The presiding authority has:

second/casting vote.

Memory

Governor → Chair

Tie → Casting vote

14 TO 16

Sections 14–16

[REPEALED]

The Act’s contents identify these historically as:

General meetings;
First constitution of Central Board;
First constitution of Local Board.

They were repealed by the Reserve Bank (Transfer to Public Ownership) Act, 1948 with effect from 1 January 1949.