The Reserve Bank: Establishment, Capital and Management

In one line

The Reserve Bank is a body corporate created by statute, owned by the Government since 1949, and governed by a Central Board on which the Government appoints everybody.

In the wording a student can write in an exam: the Reserve Bank of India was constituted under the Reserve Bank of India Act, 1934 and commenced operations on 1 April 1935; by section 3 it is a body corporate with perpetual succession and a common seal, having capital of five crores of rupees under section 4; by section 7 the Central Government may give it directions in the public interest after consultation with the Governor, and subject to those directions the general superintendence and direction of its affairs is entrusted to a Central Board of Directors; and sections 8 to 13 govern the composition of that Board, the Local Boards, disqualifications, removal and meetings.

Why the structure is worth studying

Because the whole autonomy debate is built into it. A central bank has to be independent enough to say no to the Government about money, and accountable enough not to be a power unto itself. Every central banking statute in the world is an attempt at that balance, and the Indian answer is written in sections 7 and 8.

And the answer is more Government-weighted than students expect. The Governor, the Deputy Governors and every Director are appointed or nominated by the Central Government; the Government may give directions in the public interest; and the Bank is wholly owned by the Government. Section 30 empowers the Central Government to supersede the Central Board itself. Whatever independence the Reserve Bank has is a matter of convention, of the Governor's standing, and of the Government's restraint, far more than of statutory protection.

Establishment and capital

Section 1 gives the short title and extent, and the Act came into force so that the Bank commenced operations on 1 April 1935.

Section 2 is the definitions section, and one definition has changed recently and matters. The Finance Act, 2022 amended the definition of a bank note so that it includes a bank note in digital form, which is the statutory footing of the central bank digital currency worked in chapter 620.

Section 3: establishment and incorporation. The section constitutes the Bank 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 Act, and provides that the Bank shall be a body corporate with perpetual succession and a common seal, and shall by its name sue and be sued.

Section 4: capital. "The capital of the Bank shall be five crores of rupees."