The need for the Central Bank in India arose in 1773. However it was the Hilton Young Commission in 1926 that recommended the establishment of a central bank. The Government introduced a bill in the Legislative Assembly in January 1927. The Reserve Bank of India Bill was dropped "after acrimonious and kaleidoscopic discussion," as the late Sir James Taylor put it. The Legislative Assembly was divided on the point of the constitution of the board, for the Muslim and the minority communities insisted on safeguards to protect the minorities which was guaranteed in the Assembly. Thereafter it took seven years to pass the Act in 1934, establishing it as a shareholders' bank.
The following are the salient features of the Reserve Bank of India Act of 1934;
- It has regularized the issue of Bank Notes (Currency).
- It has ensured the monetary stability in the country. The issue of currency notes must be backed by assets in the form of gold bullion, gold coins, foreign securities and rupee securities to such an aggregate amount as is not less than the total liabilities of the Issue Department. The aggregate value of gold coins, gold bullion, and foreign securities held as asses shall not at any time be less than 2/5th of the assets of the Issue Department of the Reserve Bank, and the aggregate value of gold coins and gold bullion shall not fall below Rs. 40 crores. The Governor is the Chairman of the Board of Directors. There are four Deputy Governors to assist him. The London Branch of the Reserve Bank of India was closed in 1963 and its functions were vested in the State Bank of India. Three per cent deposits of scheduled banks are kept as cash reserves with the Reserve Bank free of interest (which is known as Statutory Reserve). Reserve Bank has the power to raise these reserves from 3 per cent to 15 per cent if the circumstances so warrant In such circumstances the Reserve Bank may pay interest in excess of 3 per cent on the reserves. (This happened in 1960). The Reserve Bank was established on 1st April 1935.
- It is a lender of the last resort. The Reserve Bank is the Bankers' Bank.
- It is a banker to the Government. It manages public debts. It acts as an adviser to the Government in regard to the floating of loans, etc. The Bank Rate was raised from 4 and half per cent to 5 per cent on 29th May 1964 and to 6 per cent on 17th February 1965. The implication of the rise in the Bank Rate is that when it goes higher, the Government security rate drops. The term non-terminable security refers to loans or securities issued without deciding the time of maturity, i.e three and half per cent loan. It was issued at Rs. 100 but now the price is Rs. 66 only. The Reserve Bank may lend at a lower than the prevailing Bank Rate to improve agriculture.
Section 3 of the RBI act provides for establishment of Reserve Bank of India for taking over the management of the currency from Central Government and of carrying on the business of banking in accordance with the provisions of this Act.
Section 4 of the RBI Act defines the capital of RBI which is Rs. five crore.
Section 7 of the RBI Act empowers the central government to issue directions in public interest from time to time to the bank in consultation with RBI Governor. This section also provides power of superintendence and direction of the affairs and business of RBI to Central Board of Directors.
This section deals with the functioning of RBI. . The RBI can accept deposits from the central and state governments without interest. It can purchase and discount bills of exchange from commercial banks. It can purchase foreign exchange from banks and sell it to them. It can provide loans to banks and state financial corporations. It can provide advances to the central government and state governments. It can buy or sell government securities. It can deal in derivative, repo and reverse repo.
This section describes emergency loans to banks.
This section assigns RBI the duty of being banker to the central government and manage public debt.
This section grants power to RBI to issue the currency.
This section has provision that highest denomination note could be ₹10,000.
This section empowers the RBI to form laws concerning the exchange of damaged and imperfect notes.
This section provides that in India RBI and central government only can issue and accept promissory notes that are due on request.
This section provides that every scheduled bank need to hold an average daily balance with the RBI.