Professional Documents
Culture Documents
Provisions
Jiji T Mathew
Legal Framework
Umbrella Acts
1. Reserve Bank of India Act, 1934:governs the Reserve
Bank functions
2. Banking Regulation Act, 1949: governs the financial
sector
Acts governing specific functions
1. Public Debt Act, 1944/Government Securities Act
(Proposed): Governs government debt market
2. Securities Contract (Regulation) Act, 1956: Regulates
government securities market
3. Indian Coinage Act, 1906:Governs currency and coins
4. /Foreign Exchange Management Act, 1999 (which
replaced Foreign Exchange Regulation Act, 1973) :
Governs trade and foreign exchange market
Acts governing Banking Operations
1. Companies Act, 1956:Governs banks as companies
2. Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970/1980: Relates to nationalisation
of banks
3. Bankers' Books Evidence Act
4. Banking Secrecy Act
5. Negotiable Instruments Act, 1881
Acts governing Individual Institutions
1. State Bank of India Act, 1954
2. The Industrial Development Bank (Transfer of
Undertaking and Repeal) Act, 2003
3. The Industrial Finance Corporation (Transfer of
Undertaking and Repeal) Act, 1993
4. National Bank for Agriculture and Rural Development Act
5. National Housing Bank Act
6. Deposit Insurance and Credit Guarantee Corporation Act
The origin of RBI
• The Royal Commission on Indian Currency and
Finance (1926)-known as the Hilton-Young
Commission- recommended the creation of a
central bank in India to separate the control of
currency and credit from the government and to
augment banking facilities throughout the
country.
• Reserve Bank of India was set up in 1935, under
RBI act of 1934, as the banker to the central
government
• RBI was nationalized in 1949.
RBI Act 1934
• Specifies the institutional or legal/de jure
relationship among the monetary authority-
central bank-, government, banking sector
and the public.
• The Act relates to
– Organizational structure of the CB
– Functions of the CB
– Objectives for the assigned functions and Policy
– Independence, Accountability & Transparency
Rationale of central Bank: Why do we need a Central
Bank?
First Central Banks (CB), Swedish Riksbank (1668) and Bank of
England (1694) was established to provide the government with
finance in needy times at favorable terms.
• Need for a specialized and professional institution different from
the elected government
• Need for Development,Regulation and Supervision of Financial
System.
• Need for efficiently oversee, guide and regulate the market in
midst of globalized financial Markets and financial Innovations
• To facilitate the smooth functioning of the payments and
settlements mechanism
• Finally to formulate and conduct the monetary and exchange rate
policy and financial policy with a view to create orderly
conditions in the financial market and Goods market.
Evolution of central banks in the world
• Evolution of central banking is a 20th century
phenomenon with only a dozen or so CBs till 1873
• Only Swedish Rikz bank and Bank of England till 1800
• Now that figure is around 160
• German CB was set up in 1875 for the need to restore
and maintain a stable currency.
• Federal Reserve Board came into established in 1914
for the provision of nation-wise payment and
depository system.
• Reserve Bank of India set up in 1935, under RBI act of
1934, and was nationalized in 1948.
RBI ACT contains:
115 pages; 59 sections; 79 amendments as on Feb 28, 2009.
• 5 Chapters
I. Preliminary: title, commencement , definitions
II. Incorporation, Capital, Management and Business
III. Central banking Functions
(IIIA) Collection and Furnishing of Credit information
(IIIB) Provisions relating to Non-Banking Institutions
and Financial Institutions
(IIIC) Prohibition of Acceptance of Deposits by
unincorporated Bodies
(IIID) Regulation of transactions in Derivatives, Money
Market Instruments, Securities, Etc.
IV. General Provisions
V. Penalties
The Preamble of RBI Act states that RBI is
constituted “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”.
This can be interpreted as a statement on Objectives
of monetary policy , which implies that RBI’s main
objectives of monetary policy are Price stability
and Economic growth.
This is an example of Implicit and unclear
statement of objectives, without stating the
priorities and targets assigned the objectives of
the of monetary policy
Example 2-Statement on Objectives of monetary policy
from ESCB
• "The primary objective of the ESCB shall be to maintain
price stability". And: "without prejudice to the objective
of price stability, the ESCB shall support the general
economic policies in the Community with a view to
contributing to the achievement of the objectives of the
Community as laid down in Article 2."
• The objectives of the Union (Article 2 of the Treaty on
European Union) are a high level of employment and
sustainable and non-inflationary growth.
• The ECB Governing Council has defined price stability
as an annual increase in the Harmonised Index of
Consumer Prices (HICP) in the euro area of below 2 %.