Sections 39 and 40 of the RBI Act: Supply of Currency and Foreign Exchange Transactions
Sections 39 and 40 of the Reserve Bank of India Act, 1934 deal with two distinct functions of the Reserve Bank of India (RBI): supplying different forms of Indian currency and conducting specified foreign exchange transactions with authorised persons.
Section 39: Obligation to supply different forms of currency
Section 39(1) requires the RBI to issue rupee coins on demand in exchange for banknotes and Government of India currency notes. It also requires the RBI to issue currency notes or banknotes on demand in exchange for coins that are legal tender under the Coinage Act, 2011 (Act 11 of 2011).
Section 39(2) addresses the supply of lower denominations. In exchange for currency notes or banknotes of two rupees or above, the RBI must supply lower-value notes or legal-tender coins in quantities that, in the RBI's opinion, are required for circulation. The Central Government must supply such coins to the RBI on demand.
The section supports the availability and exchange of currency denominations within the statutory framework. It does not, by itself, guarantee that every denomination or quantity will be immediately available at every bank branch or counter. RBI directions and operational arrangements govern practical exchange facilities.
Section 40: Transactions in foreign exchange
Section 40 provides for the RBI to sell foreign exchange to, or purchase foreign exchange from, an authorised person making a qualifying demand at the offices identified in the section (Bombay, Calcutta, Delhi or Madras) or at branches determined by Central Government order.
The exchange rates and conditions for these transactions are subject to general or special orders of the Central Government, with regard to India's obligations to the International Monetary Fund in relation to exchange rates.
Minimum transaction threshold
The proviso to Section 40 states that no person is entitled to demand a purchase or sale of foreign exchange of a value below Rs. 2 lakh. This is a limitation on the statutory demand under Section 40, not a general minimum for all foreign exchange transactions undertaken through banks or money changers.
Meaning of authorised person
The printed explanation to Section 40 refers to persons entitled to buy or sell the relevant foreign exchange under the Foreign Exchange Regulation Act, 1973 (FERA). FERA was repealed and replaced by the Foreign Exchange Management Act, 1999 (FEMA), effective from 1 June 2000. Consequently, the historical wording of the explanation must be read with the later statutory framework and applicable repeal, savings and authorisation provisions, rather than treating FERA as the currently operative foreign exchange licensing law.
How Section 40 relates to FEMA, 1999
Section 40 concerns the RBI's specified dealings in foreign exchange. In contrast, FEMA supplies the principal current framework for foreign exchange management in India. Under Section 2(c) of FEMA, an authorised person includes an authorised dealer, money changer, offshore banking unit or other person authorised under Section 10(1). Section 10 empowers the RBI to authorise persons to deal in foreign exchange or foreign securities, subject to conditions.
Foreign exchange transactions by residents, businesses and visitors are subject to FEMA, the relevant rules, RBI regulations and directions, and the terms of authorisation. Section 40 should not be interpreted as granting a general public right to demand foreign exchange directly from the RBI regardless of these requirements.
Frequently asked questions
What does Section 39 of the RBI Act provide?
It deals with the exchange of rupee coins for notes, notes for legal-tender coins, and the supply of lower denominations for circulation, subject to statutory conditions.
Can the RBI be required to supply coins when the Government has not supplied them?
Under Section 39(2), if the Central Government fails to supply the required coins, the RBI is released from its corresponding obligation to supply them to the public.
Does Section 40 regulate every retail foreign exchange transaction?
No. Section 40 concerns specified foreign exchange purchases and sales by the RBI with authorised persons, subject to the statutory threshold and applicable orders. Other foreign exchange dealings are governed principally by FEMA and relevant regulations.
Official legal resources
- Department of Financial Services - Reserve Bank of India Act, 1934 (official PDF)
- India Code - Central Acts, including the Coinage Act, 2011 and FEMA, 1999
- Reserve Bank of India - Notifications, directions and currency guidance
- Department of Financial Services, Government of India
This article explains the statutory provisions and their relationship with the present regulatory framework. For a specific transaction, check the latest applicable RBI directions, notifications and authorisation conditions.