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about the RBI Act, 1934.

The Reserve Bank of India Act, 1934, is the legislation under which the
apex bank was formed. This act and the Banking Companies Act of 1949, provide  a framework for the supervision of commercial banks in India.

Important sections of the RBI Act, 1934

1.
The act
comprises the definition and classification of scheduled commercial banks in
its Second Schedule. This includes nationalised banks, State Bank of India and
its associates, Regional Rural Banks (RRBs) and private banks. A few co-operative
banks that fulfill certain criteria are included in this list.

2.
Section
17 of the act outlines the basic business functions of the RBI- it accepts
deposits of and extends advances to the Central and State governments, purchases
foreign exchange from banks and sells it to them, provides loans to banks and
state financial corporations (SFCs), purchases and sells government securities,
purchase and discounts bills of exchange, to deal in derivatives namely, repo
or reverse repo, among other functions.

3.
Section 18
outlines the RBI’s power of direct discounts. RBI has the right to lend loans
to banks, purchase or discount bills to regulate credit in the interest of the
economy.

4.
According
to Section 21 of the act, the RBI has to conduct banking affairs of the Central
and State governments along with managing public debt.

5.
Section 22
states that RBI alone has the right to issue Indian currency notes and coins.
Section 24 declares that the maximum denomination of currency should be Rs.10000.
As it is important to have the right to decide rules for exchange of damaged
and unusable notes, it is guaranteed under Section 28 of this act.

6.
Only the
RBI or the Central government is vested with the right to issue and accept promissory
notes (a financial instrument containing a person’s promise to pay a specific sum
to another person on a pre-decided date or on demand).

7.
Section
42 (I) decrees scheduled banks to maintain an average daily balance (average of
balances at the close of business) with the RBI.

Reserve Bank of India (Amendment) Act, 2006

1.
Define
the expressions, ‘derivative’, ‘repo’ and ‘reverse repo’ in Section 17 which
outlines the business of the Bank.

2.
Empower
the RBI to deal in derivatives, to lend or borrow securities and to undertake
repo or reverse repo;

3.
Remove
the lower floor and upper ceiling of Cash Reserve Ratio (CRR) and to provide
flexibility to RBI to specify CRR as per amendment to Section 42(1)

4.
Remove
ambiguity regarding the legal validity of derivatives;

5.
Chapter
III-D was included to authorise RBI to lay down policy and issue orders to
any agency dealing in various kinds of contracts with respect to government
securities, money-market instruments, derivatives, etc., and to inspect such
agencies.

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