DR.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY, LUCKNOW

ACADEMIC SESSION: 2019-20

PROJECT

POWERS OF RBI IN LIGHT OF BANKING REGULATION ACT, 1949

Submitted To: Submitted By:

Dr. Shashank Shekhar Priti Singh
th
Assistant Professor (Law) 6 Semester
Dr. Ram Manohar Lohiya National B.A. L.L.B. (Hons.)
Law University, Lucknow Roll No: 103
Section: B
 ACKNOWLEDGEMENT

I would like to express my gratitude towards all those whose help and constant support the
project would not have reached its current facet. Foremost, I would like to thank Shashank
Sir for his kind guidance and for quenching my queries on many doubts and technicalities
which I came up during the making of this project. I would take advantage of this situation to
thank the Hon’ble Vice Chancellor, Prof. Subir K. Bhatnagar, esteemed Dean (Academics)
Prof. Dr. C.M. Jariwala and Dr. Ram Manohar Lohiya National University for providing me
with such an enriching opportunity to work and research on this topic.

This project would not have seen the light of the day without the constant direction and
guidance of my parents and guardians to whom I owe a lot. I would also like to use this
opportunity to thank my brother in helping me out with the nitty-gritty of formatting.

I would also like to thank all of my friends and seniors who aided me along the way. I must
also extend my gratitude to the library and library personnel who provided me with research
material and good books to work upon and the distinguished authors, jurists and journals for
providing in the public domain such invaluable information.
 TABLE OF CONTENTS
Introduction................................................................................................................................4
Introduction to Reserve Bank of India.......................................................................................5
Structure of RBI: A Brief Outlay.............................................................................................6
Central Board of Directors.......................................................................................................6
Governors.................................................................................................................................6
Supportive bodies.....................................................................................................................6
Offices and branches................................................................................................................7
Powers of RBI: In the light of Banking Regulations Act, 1949.................................................7
Statutory background- Banking Regulation Act, 1949............................................................7
Indian banking system..............................................................................................................7
Powers and responsibilities of RBI in respect of regulation of banks......................................8
General Framework of Regulation...........................................................................................8
Licensing of banks....................................................................................................................8
Business of banking..................................................................................................................9
Permissible Activities of a Banking Company.........................................................................9
Provision of Banking Regulation Act 1966:- An Analysis......................................................10
Other Powers of RBI:.............................................................................................................12
Contribution of RBI to India....................................................................................................15
1. Promoting Capital Formation..........................................................................................15
2. 3.Encouraging Innovation...............................................................................................15
3. Monetisation....................................................................................................................15
4. Influence Economic Activity..........................................................................................16
5. Facilitator Of Monetary Policy.......................................................................................16
Conclusion................................................................................................................................17
Bibliography.............................................................................................................................18
 INTRODUCTION

Since its inception Reserve Bank has been playing key role in the formulation of monetary,
banking and financial policies. No Department has witnessed the various phases of transition
of Indian banking system from a closed one to well-liberalized one (particularly since mid-
1990s) from closer quarters than the Department of Banking Operations and Development -
popularly called DBOD. To facilitate the transition process and in order to effectively
perform its varying roles in the changing banking scenario, from regulator to facilitator over
the period, Department has undergone various organizational changes and so also in its
activities, approach and functioning.

The Reserve Bank of India is India's Central Banking Institution, which controls the
Monetary Policy of the Indian Rupee. It commenced its operations on 1 April 1935 during the
British Rule in accordance with the provisions of the Reserve Bank of India Act, 1934.The
original share capital was divided into shares of 100 each fully paid, which were initially
owned entirely by private shareholders. Following India's independence on 15 - August -
1947, the RBI was nationalized in the year of 1949.

The RBI plays an important part in the Development Strategy of the Government of India. It
is a member bank of the Asian Clearing Union. The general superintendence and direction of
the RBI is entrusted with the 20-member Central Board of Directors: the Governor, four
Deputy Governors, one Finance Ministry representatives, ten government-nominated
directors to represent important elements from India's economy, and four directors to
represent local boards headquartered at Mumbai, Kolkata, Chennai and New Delhi. Each of
these local boards consists of 5 members who represent regional interests, and the interests of
co-operative and indigenous banks.
 INTRODUCTION TO RESERVE BANK OF INDIA
India's central bank is the Reserve Bank of India (RBI). Reserve Bank of India monitors,
formulates and implements India's monetary policy. Established in the year 1935, Reserve
bank of India was nationalized in the year 1949. 1 Owned fully by the Government of India,
Reserve Bank has are 22 regional offices in various state capitals of India with its
headquarters located in Mumbai. It has a majority stake in the State Bank of India.2

It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the
recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 1934
was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of
the functioning of the Bank. In accordance with the provisions of the RBI Act, 1934 with the
main functions as:3

1. operating monetary policy with the aim of maintaining economic and financial
stability and ensuring adequate financial resources for development purposes;
2. meeting the currency requirement of the public;
3. promotion of an efficient financial system;
4. foreign exchange reserve management;
5. the conduct of banking and financial operations of the government.

It can be summarised by the preamble as "...to regulate the issue of Bank Notes and 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."4

Since the onset of the process economic reforms, including the on-going liberalization and
globalization of the economy, the role of the RBI as the Regulator of the financial sector has
grown and diversified. Reserve Bank of India is regulator for all the banks in the country and
as a regulator, apart from commercial banks, also supervises Co-operative banks, non-
Banking Finance companies, Financial Institutions etc. Thus the entire institutional function
of providing finance comes under the regulatory oversight of the RBI.

1
M L Tannan, "TANNAN'S BANKING: LAW AND PRACTICE IN INDIA" p 163 (21st Edn, 2005) 
2
S. L. N. Simha. History of the Reserve Bank of India, Volume 1: 1935–1951. RBI. 1970. ISBN 81-7596-247-X. 
3
A. Vasudevan et al. The Reserve Bank of India, Volume 3: 1967–1981. RBI. 2005. ISBN 81-7596-299-2. 
4
Reserve Bank of India Act, 1934. 
Structure of RBI: A Brief Outlay

Central Board of Directors

The Central Board of Directors is the main committee of the Central Bank. The Government
of India appoints the directors for a 4-year term. The Board consists of a Governor, and not
more than 4 Deputy Governors, 16 Directors to represent the regional boards, 2 from the
Ministry of Finance and 10 other directors from various fields. The central bank now wants to
create a post of Chief Operating Officer(COO) and re-allocate work between the five of
them(4 Deputy Governor and COO).

Governors

One of the four Deputy Governors is traditionally from RBI ranks, and is selected from the
Bank's Executive Directors. As for the rest, one is nominated from among the Chairpersons
of Public Sector Bank, and the other is an economist of repute. It is also often seen that an
officer of Indian Administrative Service is appointed Deputy Governor of RBI and later as
the Governor of RBI. The case of Y. Venugopal Reddy, an officer of Indian Administrative
Service batch of 1964 is a noted example for this trend in the RBI.

Supportive bodies

The Reserve Bank of India has four regional representations: North in New Delhi, South in
Chennai, East in Kolkata and West in Mumbai. The representations are formed by five
members, appointed for four years by the central government and serve—beside the advice of
the Central Board of Directors- as a forum for regional banks and to deal with delegated tasks
from the central board. The institution has 22 regional offices.

The Board of Financial Supervision (BFS), formed in November 1994, serves as a CCBD
committee to control the financial institutions. It has four members, appointed for two years,
and takes measures to strength the role of statutory auditors in the financial sector, external
monitoring and internal controlling systems.

The Tarapore committee was set up by the Reserve Bank of India under the chairmanship of
former RBI deputy governor S. S. Tarapore to "lay the road map" to capital account
convertibility. The five-member committee recommended a three-year time frame for
complete convertibility by 1999–2000. On 1 July 2007, in an attempt to enhance the quality
of customer service and strengthen the grievance redressal mechanism, the Reserve Bank of
India created a new customer service department.
 Offices and branches

The Reserve Bank of India has four zonal offices. It has 19 regional offices at most state
capitals and at a few major cities in India. Few of them are located in Ahmedabad, Bangalore,
Bhopal, Bhubaneswar, Chandigarh, Chennai, Delhi, Guwahati, Hyderabad, Jaipur, Jammu,
Kanpur, Kolkata, Lucknow, Mumbai, Nagpur, Patna, and Thiruvananthapuram.

The bank has also two training colleges for its officers, viz. Reserve Bank Staff College at
Chennai and College of Agricultural Banking at Pune. There are also four Zonal Training
Centres at Mumbai, Chennai, Kolkata and New Delhi.

POWERS OF RBI: IN THE LIGHT OF BANKING REGULATIONS ACT, 1949

Statutory background- Banking Regulation Act, 1949

Prior to the enactment of Banking Regulation Act, 1949 which aims to consolidate the law
relating to banking and to provide for the nature of transactions which can be carried on by
banks in India, the provisions of law relating to banking companies formed a part of the
general law applicable to companies and were contained in Part XA of the Indian Companies
Act, 1913. These provisions were first introduced in 1936, and underwent two subsequent
modifications, which proved inadequate and difficult to administer. Moreover, it was
recognized that while the primary objective of company law is to safeguard the interests of
the shareholder, that of banking legislation should be the protection of the interests of the
depositor.5 It was therefore felt that a separate legislation was necessary for regulation of
banking in India. With this objective in view, a Bill to amend the law relating to Banking
Companies was introduced in the Legislative Assembly in November, 1944 and was passed
on 10th March, 1949 as the Banking Companies Act, 1949. By Section 11 of the Banking
Laws (Application to Cooperative Societies) Act, 1965, the nomenclature was changed to the
Banking Regulation Act, 1949.6

Indian banking system

5
Cecil Kisch: Review "The Monetary Policy of the Reserve Bank of India" by K. N. Raj. In: The Economic
Journal. Vol. 59, No. 235 (Sep., 1949), pp. 436–438.
6
Findlay G. Shirras: The Reserve Bank of India. In The Economic Journal. Vol. 44, No. 174 (Jun., 1934),
pp. 258–274.
The Indian financial system currently consists of commercial banks, co-operative banks,
financial institutions and non-banking financial companies ( NBFCs). The commercial banks
can be divided into categories depending on the ownership pattern, viz. public sector banks,
private sector banks, foreign banks. While the State bank of India and its associates,
nationalized banks and Regional Rural Banks are constituted under respective enactments of
the Parliament, the private sector banks are banking companies as defined in the Banking
Regulation Act. The cooperative credit institutions are broadly classified into urban credit
cooperatives and rural credit cooperatives.

Powers and responsibilities of RBI in respect of regulation of banks

The Reserve Bank of India has been entrusted with the responsibility under the Banking
Regulation Act, 1949 to regulate and supervise banks' activities in India and their branches
abroad. While the regulatory provisions of this Act prescribe the policy framework to be
followed by banks, the supervisory framework provides the mechanism to ensure banks'
compliance with the policy prescription.7

General Framework of Regulation

The existing regulatory framework under the Banking Regulations Act 1949 can be
categorised as follows:

a) Business of Banking Companies

b) Licensing of banking companies

c) Control over Management

d) Acquisition of the Undertakings of banking companies in certain cases

e) Restructuring and Resolution including winding up operation

f) Penal Provisions

Licensing of banks

7
Cecil Kisch: Review "The Monetary Policy of the Reserve Bank of India" by K. N. Raj. In: The Economic
Journal. Vol. 59, No. 235 (Sep., 1949), pp. 436–438.
In terms of Sec 22 of the B.R.Act, no company shall carry on banking business in India,
unless it holds a licence issued in that behalf by Reserve Bank and any such licence may be
issued subject to such conditions as the Reserve Bank may think fit to impose.

Before granting any licence, RBI may require to be satisfied that the following conditions are
fulfilled:8

1. that the company is or will be in a position to pay its present or future depositors in full
as their claims accrue;

2. that the affairs of the company are not being , or are not likely to be, conducted in a
manner detrimental to the interests of its present or future depositors;

3. that the general character of the proposed management of the proposed bank will not be
prejudicial to the public interest or the interest of its depositors;

4. that the company has adequate capital structure and earning prospects;

5. that having regard to the banking facilities available in the proposed principal area of
operations of the company, the potential scope for expansion of banks already in
existence in the area and other relevant factors the grant of the licence would not be
prejudicial to the operation and consolidation of the banking system consistent with
monetary stability and economic growth;

Business of banking

As per Section 5 (b) of Banking Regulation Act, 1949 ' banking ' means the accepting , for
the purpose of lending or investment, of deposits of money from the public, repayable on
demand or otherwise and withdrawable by cheque, draft, order or otherwise.

Permissible Activities of a Banking Company

Section 6 of B.R. Act, 1949 gives the details of forms of business in which a banking
company may engage. However, it is a long list and banks may carry out one or more
activities permitted in the section.

8
Cecil Kisch: Review "The Monetary Policy of the Reserve Bank of India" by K. N. Raj. In: The Economic
Journal. Vol. 59, No. 235 (Sep., 1949), pp. 436–438.
 PROVISION OF BANKING REGULATION ACT 1966:- AN ANALYSIS

It is the Banking Regulation Act which deals with the regulation of the financial sector by the
RBI while the RBI strictly deals with the functions of RBI which are enlisted above in a
nutshell. If we have a close analysis of the Indian financial sector, we can conclude that it is
the RBI which regulates the policies, regulations, rules, etc. Let's take a closer look to the
statutory provisions giving RBI the authority:

The Banking Regulation Act was passed as the Banking Companies Act 1949 and came into
force with effect from 16.3.49. Subsequently it was changed to Banking Regulations Act
1949 with effect from 01.03.66.

SECTION 21 gives RBI the power to decide policy in relation to advances to be followed
by Banking Companies when it is necessary or expedient in public interest. 9This power to
decide the policy, once exercised, is binding on the Banking companies.7 The section gives
power to the RBI to decide on policy relating to purpose of advancement , margins to be
maintained in respect of secured advances, max amount of advances or other financial
accommodation , maximum amount to which guarantees will be given and the rate of interest
and other related terms and condition. Amendment to the sub-section 2 provides certain more
powers to the RBI which includes Section 21 of the Act was incorporated so as to enable RBI
to give directions to banks regarding their loans policies and regulate facilities and check any
speculative activities. Under this section and 54-A of the Act to RBI can issue directions
having statutory force of law imposing prohibition on payment of interest on current
accounts.10

SECTION 22 of the Act deals with grant of licenses to the banks. This section originated
with the demand for licensing of foreign banks doing business in India and was also
recommended by the Indian Central Banking Enquiry Committee, mainly with the objective
of prohibiting the entry of banks started in countries which discriminated against banks
started in India. The above section however introduces a comprehensive system of licensing
of Banks by the RBI; the grant of a license in case of banks incorporated in India is
9
Parameswaran R, Natarajan S and K P Kandasami, "BANKING LAW AND PRACTICE" p 90 (2005) 
10
RBI v State Bank of India 1996 (80) Com Cases 554; Indian Bank, Tiruvanmelllai v V.A Balasubramania
Gurukul AIR 1982 Mad 296. 
dependent upon the maintenance of a satisfactory financial condition coupled with an
additional qualification in case of foreign banks, vide sub-section 3A; and conditional
licensing. The requirement under this section can be classified under three heads :

1. Necessity of licensing and mode of applying it

2. Conditions for granting of licences and compliance with further conditions
3. Cancellation of licenses and appeals from such orders.

No banking company can commence or carry on business without obtaining a license granted

to it by RBI. To obtain a license the condition in sub-section 3 of section 22 has to be
fulfilled. In case license is cancelled by RBI they have a right to appeal to the central govt
which would be final. The same can't be availed by a new banking company whose request
for license is being turned down. RBI also has a power to cancel the license on ground given
in section 22(4).

In Sajjan Bank P Ltd. V Reserve Bank 11, such restrictions and obligation put by the section
are not violative of the fundamental right of carrying on business.12 Such powers are not
vested with a mere officer of RBI. 13Moreover, RBI has full authority to refuse or grant a
license, and the same cannot be looked into by the court, if done on irrelevant grounds.14

SECTION 23 of the act puts restriction on opening and transfer of branches both on localised
branches and foreign branches. Before granting the permission for this the RBI has to be
satisfied regarding the financial conditions and history of the company, the general character,
the adequacy of its capital structure and earning prospects and that public interest will be
served by opening or change of location. Moreover, RBI under this has the power to revoke
the permission granted it is satisfied on reasonable grounds, only after the banking company
is given a chance to be heard. This restriction is incorporated for maintenance of a
satisfactory financial position and the observance of sound banking traditions by foreign
branches of Indian banks. Opening of branch without permission is illegal.15

11
 AIR 1961 Mad 8
12
Cecil Kisch: Review "The Monetary Policy of the Reserve Bank of India" by K. N. Raj. In: The Economic
Journal. Vol. 59, No. 235 (Sep., 1949), pp. 436–438.
13
Co-operative Bank v M.S Co-operative Banks Ltd AIR 2004 SC 141. 
14
Shivabai Zoverbhai Patel v RBI AIR 1986 Guj 19 
15
SBISA Co-operative Bank Ltd v Tarun Kumar Saha 2000 Bankman 275 (Cal.) 
SECTION 27 puts an obligation for the banking companies to file returns to RBI in a
prescribed form and manner showing its assets and liabilities as at the close of the business.
Moreover, RBI has the power to ask for any statement or information relating
to banking business. This power is accepted by most of the countries including
UK.16 Moreover, every banking company, shall, not later than 20days after end of the month,
furnish to the RBI monthly return.

Moreover, within 30 days of closing, every banking company has to submit return disclosing

information about all accounts which are not operated for more than 10 years. This lets RBI
regulate the financial sector, as it has the idea regarding the credit balance which is stagnant.
In case of Fixed Deposits the period is supposed to be counted only after the maturity of the
deposits. Along with this RBI has the power to publish any information it obtains
from Banking Regulation Act in a consolidation form as it may think fit, if it is necessary for
public interest.

Along with all the above powers RBI also performs controlling and guardian authority.
Section 35-A of the act confers on RBI the power to give direction to Co-operative banks in
public interest in interest of banking policy and to secure the proper management
of banking business of any co-operative bank. The direction can be general in nature or to
any specific bank, but it is binding in nature.17

Other Powers of RBI:

RBI has the power to suspend any provision of the act if it deems fit for a period of 60
days.18 In absence of Governor of RBI, Deputy Governor can perform the same for a period
of 30days.19 It can extend the period up to 7years from 5years for disposing of non-
banking assets by the banks, if it is in the interest of the depositors.20

RBI has the final authority to decide on the paid-up capital and reserves. 21 If
any banking company wishes to form a subsidiary company for the purpose of carrying out a
business solely outside India, has to obtain RBI's prior permission.22

16
Bank of England Act 1945
17
Mohammed usman v Registrar of Co-operative societies AIR 2003 Ker 299
18
§ 4(1) 
19
§ 4(1) 
20
Proviso of section 9
21
§ 11(6) 
22
§ 19 
RBI can prohibit any bank from granting any further loans or advances or impose such
restrictions or give such direction if it appears from the returns submitted that the interest of
the depositors are likely to suffer.23 For remitting any debt due to the bank by its directors,
prior approval of RBI is required.24

The RBI is expected look from the monthly returns to the compliance with regard to
maintenance or percentage of assets in India by banking business,25 and to maintenance of
assets in India through quarterly returns. 26Special audit of the banks can be performed
whenever necessary.27 Balance sheet and accounts have to be submitted by
the banking companies to RBI every year end.28

The Reserve Bank may caution or prohibit banking companies generally or

any banking company in particular against entering into any particular transaction or class of
transactions, and generally give advice to any banking company. RBI gives assistance to
any banking company by means of the grant of a loan or advance to it.29

At any time, if it is satisfied that in the public interest or in the interest of banking policy or
for preventing the affairs of the banking company being conducted in a manner detrimental to
the interests of the banking company or its depositors it may30

(i) require the banking company to call a meeting of its directors for the purpose of
considering any matter relating to or arising out of the affairs of the banking company, or
require an officer of the banking company to discuss any such matter with an officer an
officer of the Reserve Bank;31

(ii) depute its officers to watch the proceedings at any meeting of the Board of directors of
the banking company; require that banking company to give an opportunity to the officers so
deputed to be heard at such meetings and also require such officers to send a report of such
proceedings to the Reserve Bank;32

23
§ 20(3) 
24
§ 20-A
25
§24 
26
§ 25 
27
(1-B) (1-C) (2) of §30 
28
§ 31 
29
§ 36(1)(c)
30
§ 36(1)(d) 
31
§ 36(1)(d)(i) 
32
§ 36(1)(d)(i)
(iii) require the Board of directors of the banking company to give in writing to any officer
specified by the Reserve Bank in this behalf at his usual address all notices of, and other
communications relating to, any meeting of the Board, committee or other body constituted
by it;

(iv) appoint one or more of its officers to observe the manner in which the affairs of
the banking company or of its offices or branches are being conducted and make a report
thereon;

(v) require the banking company to make, within such time as may be specified in the order,
such changes in the management as the Reserve Bank may consider necessary 

Section 10-BB of the act empowers the RBI to appoint chairman of a Banking Company
where the office appointed was on a whole time basis. RBI approves the appointment, re-
appointment, remuneration and removal of the chairman or a director 33 or auditor and any
amendments of provisions in the Memorandum or articles or resolution of a general meeting
or Board of Directors in that behalf. RBI can impose penalty for contravening any provision,
rule, regulation in the act.34

According to s 18, every banking company shall maintain in form of cash reserves with itself
of by way of current accounts with RBI or by way of net balance in current accounts. The
sum has to be equal to 3% of total time and demand liabilities in India.

There is clear evidence that the financial sector reform process has exerted considerable
positive influence on both stability and efficiency of the Indian financial sector though the
impact has not been even across all segments.

Further, while assessing the autonomy of the RBI, one should recognise that RBI is not a pure
monetary authority but is responsible for several other functions also, as a central bank. The
developments in the recent past lead one to the conclusion that, de facto, there has been
enhancement of the autonomy of the RBI. A safe and sound financial sector is a prerequisite
for sustained growth of any economy. Globalization, deregulation and advances in
information technology in recent years have brought about significant changes in the
operating environment for banks and other financial institutions. These institutions are faced

33
§ 35-B(1)(b)
34
§ 47-A 
with increased competitive pressures and changing customer demands. These, in turn, have
engendered a rapid increase in product innovations and changes in business strategies. While
these developments have enabled improvement in the efficiency of financial institutions, they
have also posed some serious risks. Banks play a very useful and dynamic role in the
economic life of every modern state.

CONTRIBUTION OF RBI TO INDIA

The economic importance of commercial banks to developing countries may be viewed thus :

1. Promoting Capital Formation

A developing economy needs a high rate of capital formation to accelerate the tempo of
economic development, but the rate of capital formation depends upon the rate of
saving.35 RBI makes sure the banks afford facilities for saving and, thus encourage the habits
of thrift and industry in the community. They mobilize the ideal and dormant capital of the
country and make it available for productive purposes. RBI regulates the policies of money
lending, interest etc to make sure promotion of capital formation takes place.

2. 3.Encouraging Innovation

The entrepreneur in innovation is largely dependent on the manner in which bank credit is
allocated and utilized in the process of economic growth.36 Bank credit enables entrepreneurs
to innovate and invest, and thus uplift economic activity and progress. RBI has the power to
decide policy in relation to advances to be followed by Banking Companies which makes
sure there is availability of attractive policies for investors etc.

3. Monetisation

Banks are the manufactures of money and they allow many to play its role freely in the
economy.37 Banks monetize debts and also assist the backward subsistence sector of the rural
economy by extending their branches in to the rural areas. RBI keeps a check on opening of

35
M. Pahlavani, R. Verma and E. Wilson, The Role of Capital Formation and Saving in Promoting Economic
Growth in Iran, 35th Australian Conference of Economists (ACE) 2006 Curtin University of Technology Perth
25-27 September, 2006 
36
A. F. W. Plumptre , The Rôle of Interest Rates and Bank Credit in the Economies of the British Dominions
The Economic Journal Vol. 49, No. 194 (Jun., 1939), pp. 222-236
37
A. F. W. Plumptre , The Rôle of Interest Rates and Bank Credit in the Economies of the British Dominions
The Economic Journal Vol. 49, No. 194 (Jun., 1939), pp. 222-236
branches to providing them with licenses. Moreover, for remitting any debt due to the bank
by its directors, prior approval of RBI is required.

4. Influence Economic Activity

Banks are in a position to influence economic activity in a country by their influence on the
rate interest etc. They can influence the rate of interest in the money market through its
supply of funds. Banks may follow a cheap money policy with low interest rates which will
tend to stimulate economic activity. In order to regulate any disaster in the financial status of
the country RBI plays a very important role.

5. Facilitator Of Monetary Policy

Thus monetary policy of a country should be conductive to economic development. But a

well-developed banking system is on essential pre-condition to the effective implementation
of monetary policy. Under-developed countries cannot afford to ignore this fact. A fine, an
efficient and comprehensive banking system is a crucial factor of the developmental process
of economy. RBI plays a very important role in regulating all the banks, policies, branches
etc which makes sure stability and transparency in the banking system of India. This
ultimately leads to a very well established and governed banking system in India.38

38
A. Vasudevan et al. The Reserve Bank of India, Volume 3: 1967–1981. RBI. 2005. ISBN 81-7596-299-2. 
 CONCLUSION

Physical products, from toasters and lawnmowers, to infant car seats and toys, to meat and
drugs, are routinely inspected and regulated for safety. The market for consumer credit is not
operating efficiently in certain areas. Evidence abounds that consumers are sold credit
products that are designed to obscure their risks and to exploit consumer misunderstanding.
Without regulatory intervention, market distortions and inefficiencies will continue to grow,
imposing substantial costs on Indian families and on the economy. For all the above we need
an apex regulatory body. RBI caters to the same.

The RBI has over the years been responding to changing economic circumstances. To
conclude, the role of RBI has been redefined through gradual evolution and adaptation, along
with some statutory changes, and not through any radical restructuring. Further, while
assessing the autonomy of the RBI, one should recognise that RBI is not a pure monetary
authority but is responsible for several other functions also, as a central bank. The
developments in the recent past lead one to the conclusion that, de facto, there has been
enhancement of the autonomy of the RBI. As regards monetary policy framework, the
objectives remained the same but the framework has been changed from time to time in a
gradual fashion in response to the evolving circumstances.
 BIBLIOGRAPHY

 M L Tannan, "TANNAN'S BANKING: LAW AND PRACTICE IN INDIA" p 163 (21st

Edn, 2005) 
 Narenda Jadhav, Partha Ray, Dhritidyuti Bose, Indranil Sen Gupta: The Reserve Bank of
India’s Balance Sheet: Analytics and Dynamics of Evolution, November 2004.
 Cecil Kisch: Review "The Monetary Policy of the Reserve Bank of India" by K. N. Raj.
In: The Economic Journal. Vol. 59, No. 235 (Sep., 1949), pp. 436–438.
 Findlay G. Shirras: The Reserve Bank of India. In The Economic Journal. Vol. 44, No.
174 (Jun., 1934), pp. 258–274.
 Parameswaran R, Natarajan S and K P Kandasami, "BANKING LAW AND
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