RBI Act 1934 — Key Sections & MPC for Bank Promotion Exam
Quick Facts — Reserve Bank of India Act 1934
- Enacted: 1934 | Came into force: 1 January 1935
- Purpose: Constitutes and governs the Reserve Bank of India — its establishment, capital, functions, and monetary policy framework
- Current Repo Rate: 5.25% (April 2026 MPC — always verify before exam)
- Current CRR: 3% (effective November 2025 — verify before exam)
- Current RBI Governor: Sanjay Malhotra
- Exam weight: 3–5 questions per paper; frequently tested alongside BR Act; key confusion areas are CRR vs SLR sections and MPC composition
The Reserve Bank of India Act 1934 is the founding legislation of India’s central bank. It establishes the RBI, defines its capital structure, lists the businesses it can conduct, governs its relationship with the Central and State governments, and (since the 2016 amendment) lays down the Monetary Policy Framework including the Monetary Policy Committee (MPC). For bank promotion exams, the RBI Act is tested alongside the Banking Regulation Act — together they form the backbone of every paper.
For how the RBI Act fits within the full syllabus and what to prioritise at each scale, see the Bank Promotion Exam Syllabus 2026. For the BR Act, see Banking Regulation Act 1949 — Key Sections & 2025 Amendments.
Establishment and structure — Sections 3 to 8
| Section | Provision |
|---|---|
| 3 | Establishment of RBI as a body corporate with perpetual succession and a common seal; headquartered in Mumbai (Bombay) |
| 4 | Paid-up capital of RBI: ₹5 crore, fully held by the Central Government (RBI was nationalised in 1949) |
| 7 | Management of RBI by the Central Board of Directors; Central Government may give directions to RBI in public interest (in consultation with the Governor) |
| 8 | Composition of the Central Board: Governor + up to 4 Deputy Governors + 10 nominated directors (by Central Government) + 2 government officials |
Business RBI can transact — Section 17
Section 17 lists the businesses the RBI is permitted to conduct. This is its operational charter. Key permitted businesses include:
- Accepting deposits from Central and State Governments and banks — without interest
- Purchasing, selling, and discounting bills of exchange and promissory notes
- Purchasing and selling of government securities (Open Market Operations)
- Making short-term loans and advances to scheduled banks, State Governments, and financial institutions
- Drawing and accepting bills of exchange payable abroad
- Purchasing foreign currencies
- Custodian of foreign exchange reserves
Section 18 — Emergency loans (Lender of Last Resort)
Section 18 empowers RBI to make loans to scheduled banks in times of emergency — even against bills or securities not ordinarily eligible. This is the statutory basis for RBI’s role as Lender of Last Resort. A bank facing a liquidity crisis can approach RBI under this section.
RBI as banker to governments — Sections 20 and 21
| Section | Provision |
|---|---|
| 20 | RBI must undertake the banking business of the Central Government — this is an obligation, not a discretion |
| 21 | RBI has the exclusive right to transact all banking business of the Central Government in India |
| 21A | RBI transacts banking business of State Governments by agreement — not an obligation (contrast with Section 20) |
Currency issuance — Sections 22 to 28
| Section | Provision |
|---|---|
| 22 | RBI has the sole right to issue bank notes in India — no other entity can issue currency |
| 24 | Maximum denomination of bank notes: ₹10,000 (the ₹2,000 note, now being withdrawn, was within this limit) |
| 25 | Design, form, and material of bank notes decided by Central Government on RBI’s recommendation |
| 26 | Every bank note shall be legal tender at any place in India for the amount expressed therein |
| 26(2) | Central Government may, on RBI’s recommendation, declare any series of notes to cease being legal tender (basis for demonetisation) |
| 28 | RBI may determine the rules for payment/exchange of lost, stolen, mutilated, or imperfect notes — the RBI Note Refund Rules operate under this section |
Cash Reserve Ratio — Section 42
Section 42(1) requires every scheduled bank to maintain a minimum average daily balance with the RBI. This is the Cash Reserve Ratio (CRR). The RBI prescribes the CRR percentage from time to time.
- Current CRR: 3% of NDTL (effective November 2025; reduced from 4% via phased cuts across Sep–Nov 2025)
- No floor or ceiling: After the 2006 amendment, the earlier statutory floor (3%) and ceiling (15%) were removed — RBI can now prescribe any CRR
- No interest paid: Banks earn no interest on CRR balances held with RBI
- SLR vs CRR: SLR is under Section 24 of the BR Act; CRR is under Section 42 of the RBI Act — this is a frequently tested distinction
NBFC regulation — Sections 45IA to 45NB
Part IIIB of the RBI Act governs Non-Banking Financial Companies (NBFCs):
- 45IA: Every NBFC must obtain a Certificate of Registration from RBI before commencing or carrying on business of a non-banking financial institution
- 45IB: NBFCs required to maintain a portion of deposits in liquid assets
- 45IC: NBFCs required to create a reserve fund and transfer 20% of net profit annually (similar to Section 17 of BR Act for banks)
- 45JA: RBI may issue directions to NBFCs in public interest
- 45L: RBI may collect information from NBFCs
- 45NB: Penalty for non-compliance
Monetary Policy Framework — Sections 45ZA to 45ZM (2016 Amendment)
The Finance Act 2016 inserted Chapter IIIF into the RBI Act, formalising India’s inflation-targeting monetary policy framework. This is tested regularly at Scale II and above.
Inflation target — Section 45ZA
The Central Government, in consultation with RBI, determines the inflation target every 5 years. Current target: CPI inflation at 4%, with a tolerance band of ±2% (i.e., 2% to 6%). If inflation falls outside this band for three consecutive quarters, RBI must report to the government with reasons and corrective action proposed.
Monetary Policy Committee (MPC) — Section 45ZB
| Aspect | Detail |
|---|---|
| Composition | 6 members — 3 from RBI (Governor + 2 officers) + 3 external members nominated by Central Government |
| Chairperson | RBI Governor (ex officio) |
| Current Governor | Sanjay Malhotra |
| Meetings | Minimum 4 times a year (at least once per quarter) |
| Voting | Each member has one vote; Governor has casting vote in case of a tie |
| Decision | Sets the policy repo rate to achieve the inflation target |
| Accountability | If inflation breaches the ±2% band for 3 consecutive quarters, MPC must submit a report to Central Government |
| Tenure of external members | 4 years; not eligible for reappointment |
Key monetary policy rates (April 2026)
| Rate | Current rate | What it is |
|---|---|---|
| Repo Rate | 5.25% | Rate at which RBI lends overnight funds to banks against government securities |
| Standing Deposit Facility (SDF) | 5.00% | Rate at which banks park excess funds with RBI (floor of LAF corridor) |
| Marginal Standing Facility (MSF) | 5.50% | Rate at which banks borrow from RBI against SLR securities in emergency (ceiling of LAF corridor) |
| Bank Rate | 5.50% | Rate at which RBI discounts bills of exchange; pegged to MSF rate |
| CRR | 3.00% | Mandatory cash reserve with RBI; earns no interest |
| SLR | ~18% | Mandatory liquid asset maintenance (BR Act Section 24); verify current rate |
The RBI has cut the repo rate by 125 basis points cumulatively since February 2025, its most aggressive easing cycle since 2019. Rates as of April 2026 MPC (60th meeting). Verify before your exam.
RBI vs BR Act — What governs what
| Aspect | RBI Act 1934 | BR Act 1949 |
|---|---|---|
| Governs | The Reserve Bank itself — its constitution, functions, monetary policy | Banking companies — their business, licensing, supervision |
| CRR | Section 42 — RBI prescribes CRR for scheduled banks | Section 18 — banks must maintain CRR (the obligation side) |
| SLR | Not in RBI Act | Section 24 — SLR requirement |
| Currency issuance | Section 22 — sole right to issue notes | Not in BR Act |
| Monetary policy | Sections 45ZA–45ZM — inflation target, MPC | Not in BR Act |
| Bank licensing | Not in RBI Act | Section 22 — RBI grants banking licence under BR Act |
| NBFC regulation | Part IIIB (Sections 45IA–45NB) | Not in BR Act |
| Nomination | Not in RBI Act | Sections 45ZA–45ZF |
Exam one-liners — RBI Act 1934
Key one-liners for revision
- RBI Act passed: 1934 | Came into force: 1 January 1935 | Nationalised: 1949
- Section 3 — RBI established as body corporate, HQ Mumbai
- Section 4 — Paid-up capital: ₹5 crore, held by Central Government
- Section 17 — Business RBI can transact (OMO, discounting bills, loans to banks)
- Section 18 — Emergency advances to banks = Lender of Last Resort
- Section 20 — Banker to Central Government: mandatory obligation
- Section 21A — Banker to State Governments: by agreement only
- Section 22 — RBI has sole right to issue bank notes
- Section 24 — Maximum denomination: ₹10,000
- Section 26 — Bank notes are legal tender; Section 26(2) = basis for demonetisation
- Section 42 — CRR for scheduled banks; currently 3% (no floor/ceiling since 2006)
- Section 45IA — NBFC must obtain Certificate of Registration from RBI
- Section 45ZA — Inflation target set by Central Government in consultation with RBI; current target 4% CPI ±2%
- Section 45ZB — MPC: 6 members (3 RBI + 3 govt-nominated); Governor chairs; casting vote with Governor
- MPC meets minimum 4 times a year; breach of ±2% for 3 consecutive quarters → report to govt
- Current Repo Rate: 5.25% | CRR: 3% | SDF: 5.00% | MSF/Bank Rate: 5.50% (April 2026)
Test yourself — MCQs on RBI Act
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What is the RBI Act 1934?
The Reserve Bank of India Act 1934 is the legislation that constitutes and governs the Reserve Bank of India. It came into force on 1 January 1935. The Act defines RBI’s capital structure, the businesses it can conduct, its role as banker to governments, its exclusive right to issue currency, and — since the 2016 amendment — the Monetary Policy Framework including the Monetary Policy Committee.
Under which section of the RBI Act is CRR prescribed?
Section 42(1) of the RBI Act requires every scheduled bank to maintain a minimum average daily balance with RBI — this is the Cash Reserve Ratio (CRR). The current CRR is 3% of NDTL (effective November 2025). No interest is paid on CRR balances. Note: SLR is separately governed by Section 24 of the Banking Regulation Act 1949, not the RBI Act.
What is the composition of the Monetary Policy Committee (MPC)?
The MPC has 6 members under Section 45ZB of the RBI Act: the RBI Governor (Chairperson, ex officio), two RBI officers nominated by the Central Board, and three external members nominated by the Central Government. Each member has one vote. The Governor has a casting vote in case of a tie. External members serve a 4-year term and are not eligible for reappointment.
Is RBI’s role as banker to State Governments mandatory like the Central Government?
No. Under Section 20, RBI must act as banker to the Central Government — it is an obligation. Under Section 21A, RBI acts as banker to State Governments only by agreement. States can have their own arrangements. This mandatory vs voluntary distinction is a common exam question.
What is the maximum denomination of a bank note under the RBI Act?
Section 24 of the RBI Act prescribes the maximum denomination of bank notes as ₹10,000. The ₹2,000 note introduced in 2016 and being phased out since 2023 was within this statutory limit. To issue a note above ₹10,000, the RBI Act itself would need to be amended.
What happens if CPI inflation breaches the ±2% band for three consecutive quarters?
Under Section 45ZA, if the MPC fails to maintain inflation within the 2–6% band for three consecutive quarters, the RBI is required to submit a report to the Central Government explaining the reasons for the failure, remedial actions proposed, and the estimated time within which inflation will return to target. This accountability mechanism was introduced by the 2016 amendment.
Related study material: Banking Regulation Act 1949 · CRR, SLR & Policy Rates Explained · All Bank Promotion Study Material · Bank Promotion Exam 2026 Complete Guide
Disclaimer: Policy rates (repo rate, CRR, SLR) are revised by the MPC and RBI periodically. The figures on this page reflect the position as of April 2026. Always verify current rates from the RBI website before your promotion exam. This page is for educational reference only.
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