Central Banking & Monetary Policy Regulations

Author: Kanishika Talwar, St Soldier College of Law

ABSTRACT

This paper looks at how India’s Central Banking Laws are dealing with completely new reality i.e., artificial intelligence, digital money, climate change rules and global online currencies. It asks a simple question: Does the Reserve Bank of India (RBI) actually have the power to run these new systems, or is it stepping outside its authority?

The study reviews Indian laws like the Reserve Bank of India Act, 1934, the Banking Regulation Act, and the Foreign Exchange Management Act, alongside key constitutional principles like privacy and non-delegation (the rule that Parliament can’t hand over too much law-making power to someone else). It also compares how other central banks i.e. the Bank of England, the European Central Bank, and the US Federal Reserve are handling the same issues.

The findings show that India’s laws were written for an older, cash-based economy. They don’t clearly cover AI-driven decisions, climate-based lending rules, or government-issued digital currency. This gap creates legal risks: the RBI could be accused of overstepping, threatening privacy, or mixing fiscal and monetary powers. The paper argues for clear, explicit new laws passed by Parliament rather than leaving everything to RBI regulations. It also suggests rules for algorithm accountability, privacy protections in digital currency, and a proper legal base for climate-risk policies. This would make the RBI more future-proof and still accountable to democratic standards.

KEYWORDS

Reserve Bank of India, Central Bank Digital Currency (CBDC), Artificial Intelligence in Monetary Policy, Climate Risk Regulation, Non-Delegation Doctrine, Privacy and Financial Data.

INTRODUCTION

Central banks worldwide are facing an unprecedented collision of technology, environmental risk, and digital finance. In India, the Reserve Bank of India (RBI), established under the Reserve Bank of India Act, 1934 was designed to manage currency, credit, and price stability in an analog, bank-centric economy. Today, however, the RBI is experimenting with Central Bank Digital Currencies (CBDCs), exploring the integration of climate risk into banking regulation, and grappling with algorithmic tools that may one day set interest rates or manage liquidity automatically. Each of these moves stretches the legal and constitutional framework originally crafted for a very different era.

This paper addresses a central question: does India’s central banking law give the RBI the legal power to deploy artificial intelligence, issue digital currency directly to the public, integrate climate mandates into monetary policy, and regulate cross-border digital assets or is it stepping beyond its mandate? The purpose of this research is to map the legal and constitutional limits of the RBI’s evolving role and to propose reforms that make the system both future-ready and democratically legitimate. Specific objectives include:

Analyzing the RBI Act, The Banking Regulation Act, and The Foreign Exchange Management Act (FEMA) to identify statutory authority and gaps;
Examining constitutional doctrines such as non-delegation, proportionality, and the Right to Privacy under Article 21.
Comparing India’s approach with that of other major central banks
Proposing a legislative and regulatory framework that aligns innovation with accountability.

The working hypothesis is that India’s current central banking law does not yet provide a clear legal basis for algorithmic decision-making, privacy-sensitive digital currency, or climate-risk integration, leaving the RBI vulnerable to ultra vires challenges and weakening public trust.

This research is significant because central banks’ credibility and independence rest on legal clarity and democratic legitimacy. Without explicit statutory authority, innovation risks becoming unconstitutional overreach; with a clear legal framework, however, India can lead globally in building a central bank that is technologically advanced, climate-conscious, and rights-respecting. By tackling these issues now, this paper aims to provide lawmakers, regulators, and scholars with a roadmap for future-proofing India’s monetary system.

LITERATURE REVIEW

Existing writing on India’s central banking powers largely treats the Reserve Bank of India as a stable, predictable institution with wide regulatory discretion. Classic commentaries on the Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949 focus on credit control, monetary policy, and bank supervision in a traditional, paper-currency economy. These texts provide solid grounding on statutory powers but barely touch on algorithmic decision-making, digital currencies, or climate risk.

On constitutional limits, the landmark judgments, In re Delhi Laws Act (1951) on non-delegation and Justice K.S. Puttaswamy (Retd.) v. Union of India (2017) Privacy has been widely discussed in administrative and constitutional law scholarship. However, most of that discussion stops at data protection or delegated legislation in general, without applying those principles to central bank innovations.

Internationally, The Bank for International Settlements (BIS), The European Central Bank, The Federal Reserve, and The Bank of England have all published reports on AI in monetary policy, central bank digital currencies (CBDCs), and climate stress testing. These studies highlight technical feasibility and financial-stability concerns but are still framed in their own statutory contexts, which differ from India’s. Very few papers compare those experiences directly to India or ask whether the RBI even has a legal mandate to copy those experiments.

Taken together, this literature shows three clear gaps:

No comprehensive doctrinal analysis of the RBI’s authority to use AI or issue retail CBDCs.
Little discussion of how constitutional rights, privacy, proportionality, and non-delegation apply to central banking innovations.
Almost no comparative work drawing lessons from foreign central banks for India’s statutory framework.

This paper addresses those gaps by linking statutory interpretation with constitutional principles and by situating India’s RBI in a global context of rapidly evolving central bank mandates.

METHODOLOGY

This study uses a qualitative, doctrinal research design, Rather than running surveys or experiments, it focuses on analyzing laws, judicial decisions and policy documents to understand the legal authority and constitutional limits of The Reserve Bank of India (RBI) in adopting emerging tools such as artificial intelligence, central bank digital currencies (CRDCs), climate-risk regulation and cross-border digital asset supervision.

Participants/Subjects:

The “participants” here are not people but the primary legal materials themselves: the Reserve Bank of India Act, 1934, Banking Regulation Act, 1949, Foreign Exchange Management Act, 1999, and relevant Supreme Court judgments such as Justice K.S. Puttaswamy (Retd.) v. Union of India (privacy), Delhi Laws Act Case (non-delegation), and Internet and Mobile Association of India v. RBI (crypto currency regulation). Secondary sources include the RBI’s Concept Note on Central Bank Digital Currency (2022) and Discussion Paper on Climate Risk and Sustainable Finance (2022), as well as international reports from the Bank for International Settlements (BIS) and the Bank of England.

Data Collection:

Legal texts, RBI policy documents, BIS working papers, and foreign central bank reports were collected from official websites and online databases. These documents provide a comprehensive view of the legal framework and comparative practices.

Data Analysis:

The materials were examined through doctrinal legal analysis, focusing on statutory interpretation, constitutional principles, and comparative law. This includes identifying the scope of RBI’s delegated powers, evaluating potential ultra vires actions, and comparing India’s approach with that of the ECB, the Federal Reserve, and the Bank of England.

Ethical Considerations:

Because the study is based on publicly available statutes, judgments, and policy papers, there are no direct risks to human subjects. Nonetheless, care was taken to use official and verified sources, to attribute all materials correctly in Bluebook 19th Edition footnotes, and to avoid misrepresentation of any data or policy positions.

This methodology allows the research to systematically explore whether India’s existing central banking law is prepared for AI-driven monetary policy, digital currencies, and climate-based interventions while remaining constitutionally sound.

RESULTS

The legal review shows four clear patterns.

AI & Algorithmic Decision-Making: No Indian statute explicitly permits the RBI to delegate monetary policy decisions to artificial intelligence or machine learning systems. The Reserve Bank of India Act, 1934 provides only for human decision-making by the Central Board or Monetary Policy Committee. This gap creates a potential non-delegation problem under Indian constitutional law.
Central Bank Digital Currency (CBDC): The RBI’s Concept Note on CBDC (2022) acknowledges privacy concerns and a new “direct to public” model. However, neither the RBI Act nor the Payment and Settlement Systems Act explicitly authorize issuing digital rupees directly to individuals. This raises questions about ultra vires action and the need for Parliament to legislate before full rollout.
Climate Risk Integration: The RBI Discussion Paper on Climate Risk and Sustainable Finance (2022) mirrors practices at the Bank of England and the European Central Bank. Yet the RBI Act contains no explicit environmental or sustainability mandate. Integrating climate considerations into monetary policy therefore sits in a legal grey zone.
Cross-Border Digital Assets: After Internet and Mobile Association of India v. RBI (2020), the Supreme Court signaled limits on RBI’s power to ban crypto currency dealings without clear statutory authority. This suggests that regulating or banning stable coins or metaverse currencies under FEMA or the RBI Act could again be vulnerable to legal challenge.

Overall, the data confirm the hypothesis that India’s central banking law is under-specified for 21st-century innovations.

DISCUSSION

Interpretation:

These findings show that the RBI is moving into areas where its legal authority is thin. AI-driven monetary policy risks violating the non-delegation doctrine. CBDCs without explicit statutory backing could trigger privacy and constitutional challenges. Climate risk mandates may exceed RBI’s remit, and cross-border digital asset regulation faces judicial skepticism.

Comparison with Previous Research:

Earlier Indian literature treated central banking law as stable and largely sufficient. International research (BIS, ECB, Fed, and BoE) already debates the need for new laws for AI and CBDCs. This paper’s results align with that international trend but show India’s gaps are especially acute.

Implications:

Parliament must amend key statutes to provide a clear mandate, privacy-by-design rules for CBDCs, and algorithmic accountability standards. Without this, RBI actions risk litigation and erosion of public trust.

Limitations:

This study is doctrinal and qualitative. It does not include interviews with policymakers or quantitative modeling of financial risks. The analysis relies on publicly available materials, which may not reveal internal RBI practices or draft policies. Future research could include empirical surveys of stakeholders or model privacy impacts of CBDCs.

CONCLUSION

This research shows that India’s central banking law, built in the mid-20th century, does not fully cover the new realities of artificial intelligence, central bank digital currencies (CBDCs), climate risk mandates, and cross-border digital assets. The Reserve Bank of India (RBI) is experimenting with these innovations, but the Reserve Bank of India Act, 1934, the Banking Regulation Act, 1949, and FEMA, 1999 provide only partial authority. Judicial precedents such as Internet and Mobile Association of India v. RBI (2020) and the non-delegation principles from the Delhi Laws Act Case reinforce the risk of ultra vires action and constitutional challenge.

RECOMMENDATIONS

Legislative Reform: Parliament should amend the RBI Act and allied statutes to explicitly authorize the use of AI in monetary policy, the issuance of retail CBDCs, and the integration of climate-risk criteria into banking regulation.

Algorithmic Accountability: Any AI-driven decision-making in monetary policy should be transparent, auditable, and subject to parliamentary oversight.

Privacy-by-Design in CBDCs: Statutes must guarantee data minimization, privacy and due process under Article 21 of the Constitution.

Climate-Risk Mandate: The RBI’s climate agenda should be grounded in a clear statutory provision rather than soft guidance alone.

Cross-Border Digital Asset Regulation: RBI and FEMA rules should be harmonized with international standards and tested for constitutional compliance before enforcement.

FUTURE RESEARCH

Because this study was doctrinal, future research could:

Model privacy risks of different CBDC designs using technical simulations;
Conduct interviews with policymakers, central bank technologists, and legislators to map how decisions are made internally;
Compare India’s legal evolution with other emerging economies (Brazil, South Africa, Indonesia) experimenting with CBDCs and climate mandates;
Explore how courts may interpret AI-based decision-making under administrative law principles in India.

SIGNIFICANCE

Updating India’s central banking law now will avoid legal crises later. By legislating a future-proof mandate, Parliament can ensure the RBI remains innovative, independent, and democratically accountable.

REFERENCES & SOURCES

INDIAN STATUTES

. Reserve Bank of India Act, No. 2 of 1934, INDIA CODE (1934).
. Banking Regulation Act, No. 10 of 1949, INDIA CODE (1949).
. Foreign Exchange Management Act, No. 42 of 1999, INDIA CODE (1999).
Payment and Settlement Systems Act, No. 51 of 2007, INDIA CODE (2007).
. INDIA CONST. art. 21.

INDIAN CASE LAWS

In re Delhi Laws Act, 1912, (1951) S.C.R. 747 (India).
Justice K.S. Puttaswamy (Retd.) v. Union of India, (2017) 10 S.C.C. 1 (India).
Internet & Mobile Ass’n of India v. Reserve Bank of India, (2020) 10 S.C.C. 274 (India).

RBI DOCUMENTS