The Reserve Bank of India Act, 1934 is the cornerstone of India’s monetary and banking framework. It provides statutory authority to the Reserve Bank of India (RBI) to regulate currency, credit, and the banking system. Although the Act has been updated through several amendments—most notably to introduce a formal monetary policy framework, regulate Non-Banking Financial Companies (NBFCs), and enable Central Bank Digital Currency (CBDC) in 2022, along with governance reforms in 2025—it continues to bear features of the pre-liberalisation economic model. As a result, several criticisms and limitations remain, many of which have been highlighted by courts and expert committees.
- Inadequate Response to Modern Financial Developments: The RBI Act does not comprehensively address emerging areas such as fintech regulation, digital lending, cryptocurrencies, shadow banking, and complex cross-border capital flows. While the RBI has issued several guidelines and circulars in these areas, the absence of clear statutory backing creates regulatory uncertainty.
The Financial Sector Legislative Reforms Commission (FSLRC), chaired by Justice B. N. Srikrishna (2013), highlighted that India’s financial laws are fragmented and outdated. It recommended replacing multiple old statutes, including the RBI Act, with a modern and unified financial code that clearly defines regulatory powers, consumer protection, and systemic risk management. Although the recommendations were not fully implemented, they remain highly influential in academic and policy debates.
- Overdependence on Delegated Legislation: Due to gaps in the Act, the RBI frequently relies on circulars, master directions, and regulatory guidelines. While this allows flexibility, it also raises questions about legal certainty and democratic accountability.
In Internet and Mobile Association of India v. RBI (2020), the Supreme Court struck down the RBI’s circular restricting banking services to cryptocurrency-related businesses, holding that the measure was disproportionate. The case highlighted the risks of relying heavily on executive directions without explicit statutory backing, and underscored the need for clearer legislative guidance in emerging financial sectors.
- Weak Accountability and Transparency Framework: Although the RBI Act grants wide powers to the central bank, it does not impose strong obligations for regular parliamentary oversight or structured public evaluation of key policy decisions.
The Raghuram Rajan Committee on Financial Sector Reforms (2008) recommended greater transparency in regulatory functioning while preserving operational independence. Similarly, the Narasimham Committee II (1998) emphasised the need for accountability mechanisms to accompany expanded regulatory powers of the RBI.
Judicial support for transparency can be seen again in RBI v. Jayantilal N. Mistry (2016), where the Supreme Court rejected the RBI’s claim of blanket confidentiality and reinforced the idea that accountability is essential for public trust.
- Lack of Statutory Coordination among Financial Regulators: The RBI Act does not clearly define mechanisms for coordination between the RBI and other financial regulators such as SEBI and IRDAI, leading to overlaps and regulatory gaps, particularly in hybrid financial products and conglomerates.
The FSLRC (2013) strongly recommended the creation of a clear statutory framework for inter-regulatory coordination and systemic risk oversight. It proposed a Financial Stability and Development Council (FSDC) with defined legal authority. Although the FSDC exists, it operates mainly through executive action rather than a strong statutory mandate.
- Need for Comprehensive Reform: These judicial observations and expert recommendations collectively point to the need for continuous reform of the RBI Act. Modernising the Act to address technological innovation, clarify executive powers, strengthen accountability, and institutionalise regulatory coordination is essential to ensure financial stability and maintain public confidence in the RBI.
- Threat to Central Bank Independence: Section 7 One of the most controversial provisions of the RBI Act is Section 7, which empowers the Central Government to issue directions to the RBI in the public interest after consultation with the Governor. Although this power has never been formally used to override the RBI, its existence raises concerns about possible executive interference in monetary policy. However, while Section 7 remains controversial, it has only been used for consultations, not directives.
The Supreme Court, in RBI v. Jayantilal N. Mistry (2016), emphasised the importance of transparency and autonomy of the RBI while dealing with disclosure of information. Although the case was decided in the context of the Right to Information Act, the Court recognised the RBI as an independent regulator acting in the larger public interest, reinforcing the principle that undue executive influence can undermine financial stability.
Expert bodies such as the Urjit Patel Committee (2014) on Monetary Policy Framework strongly recommended institutional independence of the RBI. This led to the introduction of the Monetary Policy Committee (MPC) under the RBI Act, but critics argue that Section 7 still remains a latent threat to autonomy and should be more narrowly defined.
Conclusion
The Reserve Bank of India Act, 1934 provides a strong legal foundation that equips the RBI with wide-ranging powers over monetary policy, banking regulation, and currency issuance, while simultaneously embedding institutional checks through government consultation, board oversight, and judicial review. However, the Act reflects a pre-liberalisation mindset and has struggled to keep pace with the realities of a liberalised, technology-driven, and globally integrated financial system. Judicial decisions such as Jayantilal N. Mistry and IMAI v. RBI, along with expert committee recommendations including those of the Urjit Patel Committee, FSLRC, and Narasimham Committee, highlight structural gaps relating to transparency, accountability, and regulatory clarity. Recent Supreme Court jurisprudence, particularly in the context of demonetisation, further reinforces the importance of procedural fairness, proportionality, and reasoned decision-making. Therefore, periodic and substantive reform of the RBI Act is essential to strengthen the RBI’s independence while ensuring democratic accountability, legal certainty, and institutional resilience in addressing emerging financial and technological challenges.
